<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 1995
REGISTRATION NO. 33-54545
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HOST MARRIOTT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7011 53-0085950
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
(301) 380-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEPHEN J. MCKENNA, ESQ.
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
(301) 380-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
PLEASE SEND COPIES OF COMMUNICATIONS TO:
BRUCE E. ROSENBLUM, ESQ.
SCOTT C. HERLIHY, ESQ.
LATHAM & WATKINS
1001 PENNSYLVANIA AVENUE, N.W. SUITE 1300
WASHINGTON, D.C. 20004-2505
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As promptly as practicable after the effective date of this
Registration Statement.
If the securities being registered on this form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [X]
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- --------------------------------------------------------------------------------
<PAGE>
HOST MARRIOTT CORPORATION
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1 LOCATION OR HEADING IN THE PROSPECTUS
ITEM NUMBER AND CAPTION OR REGISTRATION STATEMENT
----------------------- -------------------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front and Outside Back Cover Page
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............. Prospectus Summary; Risk Factors
4. Use of Proceeds.............. Use of Proceeds
5. Determination of Offering
Price........................ The Offering
6. Dilution..................... *
7. Selling Security Holders..... *
8. Plan of Distribution......... Plan of Distribution
9. Description of Securities to
be Registered................ Description of the Warrants; Description of
Capital Stock
10. Interests of Named Experts
and Counsel.................. Legal Matters; Experts
11. Information With Respect to
the Registrant............... Business and Properties; Legal Proceedings;
Price Range of Common Stock and Dividends;
Selected Historical Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Capitalization of the Company;
Pro Forma Condensed Consolidated Financial
Data; Management; Certain Transactions;
Ownership of Company Securities; Index to
Financial Statements
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. *
</TABLE>
- --------
* Inapplicable
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED APRIL 11, 1995
PROSPECTUS
HOST MARRIOTT CORPORATION
7,700,000 WARRANTS TO ACQUIRE SHARES OF COMMON STOCK
7,700,000 SHARES OF COMMON STOCK
Host Marriott Corporation, a Delaware corporation (the "Company"), is issuing
7,700,000 Warrants (the "Warrants") to acquire shares of the Company's common
stock, $1.00 par value per share ("Common Stock") in connection with the
settlement of class action lawsuits instituted against the Company and certain
individual defendants by certain holders and purchasers of senior notes and
debentures of the Company. The Warrants were distributed pursuant to such
settlement to the "Initial Warrantholders" as described more fully herein. See
"Plan of Distribution." Additionally, 7,700,000 shares of Common Stock which
may be purchased upon exercise of the Warrants by holders thereof are being
offered hereby on a continuous basis. As of the date of this Prospectus,
approximately 66,000 Warrants have been exercised and approximately 66,000
shares of Common Stock have been issued thereunder.
Each Warrant entitles the holder upon exercise to acquire one share of Common
Stock, at the exercise price of (i) $8.00, if exercised on or before 5:00 p.m.
New York City time on October 8, 1996 or (ii) $10.00, if exercised after 5:00
p.m. New York City time on October 8, 1996, but on or before 5:00 p.m. New York
City time on October 8, 1998, subject to adjustment. See "Description of the
Warrants." The Warrants may be exercised at any time on or before 5:00 p.m. New
York City time on October 8, 1998 (the "Expiration Time"). The Warrants were
issued in connection with the settlement of certain lawsuits and the Company
did not receive any proceeds from issuance of the Warrants. Proceeds to the
Company from the exercise of all Warrants, assuming an exercise price for each
Warrant of $8.00 and $10.00 would be $61,600,000 and $77,000,000, respectively,
before deducting expenses payable by the Company. No underwriting discounts or
commissions will be paid in connection with this offering.
The Company does not intend to list the Warrants on any securities exchange
and no assurances can be given that a trading market for the Warrants will
develop or be maintained. The Common Stock is traded on the New York Stock
Exchange and on the Chicago Stock Exchange, the Pacific Stock Exchange and the
Philadelphia Stock Exchange under the symbol "HMT." On April 10, 1995, the last
reported sale price of the Common Stock, as reported on the New York Stock
Exchange Composite Tape, was $10.625 per share. See "Price Range of the Common
Stock and Dividends."
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER
"RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------
The date of this Prospectus is April , 1995
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material may be obtained by mail from the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Reports, proxy
statements and other information regarding the Company may also be inspected at
the offices of the New York Stock Exchange (the "NYSE"), 20 Broad Street, New
York, New York 10005, the Pacific Stock Exchange, 301 Pine Street, San
Francisco, California 94104, the Chicago Stock Exchange, 440 South LaSalle
Street, Chicago, Illinois 60605 or the Philadelphia Stock Exchange, 1900 Market
Street, Philadelphia, Pennsylvania 19103.
The Company has filed with the Commission a Registration Statement on Form S-
1 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Warrants and the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. For further
information with respect to the Company, the Warrants and the Common Stock,
reference is made to the Registration Statement and exhibits thereto. The
Registration Statement, together with the exhibits thereto, may be inspected at
the Commission's public reference facilities in Washington, D.C. and copies of
all or any part thereof may be obtained from the Commission upon payment of the
prescribed fees.
----------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless the context otherwise requires, the term "Company" refers to Host
Marriott Corporation and its subsidiaries and their respective operations.
THE COMPANY
The Company is one of the largest owners of lodging properties in the world.
The Company owns 100 lodging properties that are generally operated under
Marriott brand names and managed by Marriott International, Inc. ("Marriott
International"), formerly a wholly-owned subsidiary of the Company. The Company
is the largest owner of hotels operated under Marriott brands. The Company also
holds minority interests in various partnerships that own, in the aggregate,
over 260 additional properties operated by Marriott International. The
Company's properties span several market segments, including full-service
(primarily Marriott Hotels, Resorts and Suites), moderately-priced (Courtyard
by Marriott), extended-stay (Residence Inn by Marriott) and economy (Fairfield
Inn by Marriott).
The Company seeks to grow primarily through opportunistic acquisitions of
full-service hotels in the U.S. and abroad. The Company believes that the full-
service segment of the market offers opportunities to acquire assets at
attractive multiples of cash flow and at discounts to replacement value,
including under-performing hotels which can be improved under new management.
The Company believes that the full-service segment, in particular, has
potential for improved performance as the economy continues to improve and as
business travel continues to increase. During 1994, the Company acquired 15
full-service hotels totalling approximately 6,000 rooms in several transactions
for approximately $443 million. The Company also provided 100% financing
totalling approximately $35 million to an affiliated partnership, in which the
Company owns the sole general partner interest, for the acquisition of two
full-service hotels (totalling another 684 rooms). Additionally, the Company
acquired a controlling interest in one 662-room full-service hotel through an
equity investment of $16 million and debt financing of $36 million (the debt
was subsequently sold in 1995). In 1995, the Company purchased a 300-room full-
service hotel for $15 million. The Company considers all nineteen properties as
owned hotels for accounting purposes. The Company is also engaged in
discussions with respect to other acquisition opportunities. In 1994, the
Company sold 26 of its 30 Fairfield Inns. The Company also sold its 14 senior
living communities in 1994. In 1995, the Company sold and leased back 21 of its
Courtyard properties and entered into an agreement to sell and lease back 17
additional Courtyard properties.
The Company is also the leading operator of airport and tollroad food and
merchandise concessions, with facilities in virtually every major commercial
airport in the U.S. The Company operates restaurants, gift shops and related
facilities at over 70 airports, on 14 tollroads (including over 95 travel
plazas) and at more than 35 tourist attractions, stadiums and arenas. Many of
the Company's concessions operate under branded names, including Pizza Hut,
Burger King, Taco Bell, Sbarro's, Dunkin' Donuts, Starbucks, TCBY (The
Country's Best Yogurt), Mrs. Fields and Cheers.
THE DISTRIBUTION AND RELATED TRANSACTIONS
Prior to October 8, 1993, the Company was named "Marriott Corporation." In
addition to conducting the Company's existing businesses of owning lodging
properties (the "Ownership Business") and operating restaurants, cafeterias,
gift shops and related facilities at airports, stadiums, arenas and tourist
attractions and on highway systems (the "Host/Travel Plazas Business"),
Marriott Corporation engaged in lodging and senior living services management,
timeshare resort development and operation, food service and facilities
3
<PAGE>
management and other contract services businesses (the "Management Business").
On October 8, 1993, Marriott Corporation made a special dividend consisting of
the distribution (the "Distribution") to holders of outstanding shares of
Common Stock, on a share-for-share basis, of all outstanding shares of its
wholly-owned subsidiary, Marriott International, Inc. ("Marriott
International"), which at the time of the Distribution held all of the assets
relating to the Management Business. Marriott International now conducts the
Management Business as a separate publicly-traded company. See "The
Distribution." The Company and Marriott International are parties to several
important ongoing arrangements, including agreements pursuant to which Marriott
International manages most of the Company's lodging properties and a $630
million line of credit (the "Line of Credit") provided by Marriott
International to the Company's wholly-owned subsidiary, HMH Holdings, Inc.
("Holdings") pursuant to a Credit Agreement between Holdings and Marriott
International (the "Credit Agreement"). See "Financing--Credit Agreement." In
connection with the Distribution, the Company consummated an exchange offer
(the "Exchange Offer") pursuant to which holders of approximately $1.2 billion
of its senior notes ("Old Notes") exchanged Old Notes for a combination of (i)
cash, (ii) Common Stock and (iii) new notes ("New Notes") issued by Host
Marriott Hospitality, Inc. ("Hospitality"), an indirect wholly-owned subsidiary
of the Company. See "The Exchange Offer and Restructuring." References herein
to "the Distribution and related transactions" include the Exchange Offer.
THE OFFERING
Securities Offered...... 7,700,000 Warrants to acquire shares of Common Stock
of the Company; and 7,700,000 shares of Common Stock
issuable upon the exercise of the Warrants.
Use of Proceeds......... The Warrants were issued as part of a settlement of
class action litigation and will not result in any
cash proceeds to the Company. Proceeds from exercises
of Warrants will be used for general corporate
purposes.
NYSE Trading Symbol..... HMT
Risk Factors............ Prospective investors should carefully consider the
matters set forth under "Risk Factors."
DESCRIPTION OF THE WARRANTS
Total Number of
Warrants................ Warrants which, when exercised, entitle the holders
thereof (each such holder, a "Warrantholder") to
acquire an aggregate of 7,700,000 shares of Common
Stock (subject to adjustments).
Expiration Time......... No Warrant may be exercised after 5:00 p.m., New York
City time on October 8, 1998.
Exercise of Warrants.... Each Warrant entitles the Warrantholder, upon
exercise, to acquire from the Company one share of
Common Stock, at the exercise price of (i) $8.00, if
exercised on or before 5:00 p.m. New York City time
on October 8, 1996 or (ii) $10.00, if exercised after
5:00 p.m. New York City time on October 8, 1996, but
on or before 5:00 p.m. New York City time on October
8, 1998, subject to adjustment. Warrants are not
exercisable during any Suspension Period (as
described below).
No Rights as a
Stockholder............. Warrantholders will not be entitled to any assets of
the Company or rights as shareholders of the Company,
including with respect to voting.
4
<PAGE>
No Fractional Shares.... The Company will not issue warrants to purchase
fractional shares of Common Stock. As a result, the
Warrants to which each Initial Warrantholder is
entitled will be rounded downward where the
fractional portion of such entitlement, if any,
involves less than one-half of a Warrant or upward
where the fractional portion of such entitlement, if
any, involves one-half or more of a Warrant, subject
to the overall limitation on the issuance of
Warrants. In the event of certain transactions,
described below, the number of shares of Common Stock
that may be purchased upon the exercise of each
Warrant is subject to adjustment. The Company will
not issue fractional shares of Common Stock on the
exercise of Warrants otherwise issuable as a result
of any of the aforementioned adjustments. If any
fraction of a share of Common Stock would be issuable
on the exercise of any Warrants (or portion thereof),
the Company shall pay to the exercising Warrantholder
(in lieu of issuance of such fractional share of
Common Stock) an amount of cash equal to the Exercise
Price on the date the Warrant is presented for
exercise, multiplied by such fraction.
Adjustment Provisions... The exercise price and number of shares of Common
Stock issuable upon exercise of the Warrants are
subject to adjustment from time to time upon the
occurrence of certain events, including (i) a change
in the capital stock of the Company (as described
more fully herein); (ii) certain distributions by the
Company of rights, options or warrants to acquire
Common Stock and (iii) certain other pro rata
distributions to holders of Common Stock. See
"Description of Warrants--Adjustment Provisions."
Registration of Warrant
Shares.................. The Company has agreed to use its reasonable best
efforts to maintain the effectiveness under the
Securities Act of the registration statement of which
this Prospectus is a part, until the earlier of the
Expiration Time or the date on which all Warrants
have been exercised, subject to the Company's right
to discontinue the effectiveness of such registration
statement for such periods as the Company determines
are necessary and appropriate (any such period
referred to as a "Suspension Period").
Warrants Outstanding.... Warrants to acquire 7,700,000 shares of Common Stock
were issued in 1994. Approximately 66,000 warrants
have been exercised as of the date of this
Prospectus.
Common Stock
Outstanding............. As of March 24, 1995, 158.7 million shares of Common
Stock are outstanding. This does not include (i) 7.6
million shares of Common Stock issuable upon exercise
of the Warrants, (ii) 11.1 million shares of Common
Stock subject to options granted to executive
officers and certain current and former employees of
the Company, with a weighted average exercise price
of $4.33 per share (certain of which options are
subject to vesting requirements), (iii) 2.6 million
shares of Common Stock issuable to executive officers
and certain current and former employees under
deferred stock incentive plans (certain of which
shares are subject to vesting requirements) and (iv)
737,000 shares of Common Stock issuable upon exercise
of conversion rights by holders of the Company's
Series A Cumulative Convertible Preferred Stock. See
"Management--Executive Officer Compensations,"
"Description of the Warrants" and "Description of
Capital Stock--Convertible Preferred Stock."
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents (i) summary historical and pro forma financial
data of the Company for the year ended December 30, 1994, and (ii) summary
historical balance sheet and pro forma income statement data of the Company for
the year ended December 31, 1993. The historical financial data provided herein
is derived from the consolidated financial statements of the Company included
in this Prospectus and the 1994 pro forma financial data provided herein is
derived from the Pro Forma Condensed Consolidated Statement of Income of the
Company and the consolidated financial statements of the Company included in
this Prospectus, and includes the effect of the acquisitions and dispositions
discussed in this Prospectus. The 1993 pro forma income statement data is
derived from the pro forma financial data included in the Prospectus dated
October 17, 1994, and includes the effect of the October 8, 1993 Distribution,
Exchange Offer and Restructuring discussed in this Prospectus. The pro forma
financial information set forth below may not necessarily be indicative of the
results that would have been achieved had such transactions been consummated as
of the dates indicated, or that may be achieved in the future. The information
presented below should be read in conjunction with the Host Marriott
Corporation Consolidated Financial Statements and Notes thereto, Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in this Prospectus, and the Prospectus dated October 17, 1994. The
following information is unaudited, except for the historical financial income
statement and balance sheet data for 1994 and the balance sheet data as of
December 31, 1993.
<TABLE>
<CAPTION>
FISCAL YEAR
1993
FISCAL YEAR FISCAL YEAR (PRO FORMA,
1994 1994 EXCEPT BALANCE
(HISTORICAL) (PRO FORMA)(5) SHEET DATA)(6)
------------ -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.......................... $1,501 $1,478 $1,354
Operating profit before corporate
expenses and interest............ 191 177 122
Interest expense.................. 206 168 190
Loss before extraordinary item and
cumulative effect of changes in
accounting principles(1)......... (19) (7) (60)
BALANCE SHEET DATA:
Total assets...................... $3,822 $3,591 $3,848
Debt(2)........................... 2,259 2,033 2,499
OTHER DATA:
EBITDA(3)......................... $ 376
Cash from operations.............. 158
Cash used in investing activities. (192)
Cash from financing activities.... 26
Ratio of earnings to fixed
charges(4)....................... --
</TABLE>
- --------
(1) Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," was adopted in the first fiscal quarter of 1993. In the second
fiscal quarter of 1993, the Company changed its accounting method for
assets held for sale. See "Notes to Consolidated Financial Statements."
(2) The December 31, 1993 debt amount includes $20 million of convertible
subordinated debt in the form of Liquid Yield Option Notes (LYONs). Long-
term debt of the Company at December 30, 1994 and December 31, 1993 was
$2.1 billion, respectively.
(3) EBITDA, as defined in the New Notes Indenture, consists of the sum of
consolidated net income (loss), interest expense, income taxes,
depreciation and amortization and certain other non-cash charges. EBITDA
data is presented because such data is used by certain investors to
determine the Company's ability to meet debt service requirements. The
Company considers EBITDA to be an indicative measure
6
<PAGE>
of the Company's operating performance due to the significance of the
Company's long-lived assets. EBITDA measures the Company's ability to
service debt, fund capital expenditures and expand its business; however,
such information should not be considered as an alternative to net income,
operating profit, cash flows from operations, or any other operating or
liquidity performance measure prescribed by generally accepted accounting
principles.
(4) The ratio of earnings to fixed charges is computed by dividing income
(loss) before taxes, interest expense and other fixed charges by total
fixed charges, including interest expense, amortization of debt issuance
costs and the portion of rent expense which represents interest. Earnings
were inadequate to cover fixed charges by $17 million for the year ended
December 30, 1994. The deficiency is largely the result of depreciation and
amortization of $174 million for the year ended December 30, 1994.
(5) The 1994 pro forma balance sheet information presents the financial
information of the Company as if the sale/leaseback of the 21 Courtyard
properties and the probable 1995 sale/leaseback of 17 additional Courtyard
properties had been completed as of December 30, 1994. The 1994 pro forma
income statement information presents the results of operations of the
Company as if the following transactions had been completed as of January
1, 1994: 1994 addition of 18 full-service properties; 1994 sale of 14
senior living communities; 1994 sale of 26 Fairfield Inns; 1995
sale/leaseback of 21 Courtyard properties; and the probable 1995
sale/leaseback of 17 additional Courtyard properties. See "Pro Forma
Condensed Consolidated Financial Data".
(6) The 1993 pro forma income statement information presents the financial
information of the Company as if the Distribution, Exchange Offer and
Restructuring occurred on January 2, 1993. This 1993 pro forma information
does not include the effect of the 1994 and 1995 acquisition and
disposition transactions.
7
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors before
purchasing the securities offered hereby.
SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS
The Company has substantial indebtedness. As of December 30, 1994, the
Company had consolidated debt of $2.3 billion and total shareholders' equity of
$710 million. The Real Estate Group and Operating Group businesses are capital
intensive, and the Company will have significant capital requirements in the
future. The Company's leverage could affect its ability to obtain financing in
the future or to undertake refinancings on terms and subject to conditions
deemed acceptable by the Company.
A significant portion of the business of the Company's Real Estate and
Operating Groups (each as defined herein) is conducted by subsidiaries of
Hospitality (a second-tier subsidiary of the Company). As of December 30, 1994,
Hospitality had approximately $930 million in aggregate principal amount of New
Notes outstanding, which are secured by a pledge of the stock of, and
guaranteed by, Hospitality and certain of its subsidiaries. The indenture
governing these notes contains covenants that, among other things, (i) limit
the ability of Hospitality to pay dividends and make other distributions and
restricted payments, (ii) limit the ability of Hospitality and its subsidiaries
to incur additional debt, (iii) limit the ability of Hospitality and its
subsidiaries to create additional liens on their respective assets, (iv) limit
the ability of the subsidiaries of Hospitality to incur debt and issue
preferred stock, (v) limit the ability of Hospitality and its subsidiaries to
engage in certain transactions with related parties, (vi) limit the ability of
each subsidiary of Hospitality to enter into agreements which restrict such
subsidiary in paying dividends or making certain other payments and (vii) limit
the activities and businesses of Holdings. See "Financing--New Notes" and "The
Exchange Offer and Restructuring." In addition, the Credit Agreement with
Marriott International imposes certain restrictions on the ability of the
Company and certain other subsidiaries to incur additional debt, impose liens
or mortgages on their properties (other than various types of liens arising in
the ordinary course of business), extend new guarantees (other than replacement
guarantees), pay dividends, repurchase their common stock, make investments and
incur capital expenditures. The above restrictions may limit the Company's
ability to secure additional financing, and may prevent the Company from
engaging in transactions that might otherwise be beneficial to the Company. See
"Financing--Credit Agreement."
PENDING LITIGATION
In March 1993, the Company reached agreement in principle (the "Class Action
Settlement") with certain holders and recent purchasers of the Company's old
notes, who had either instituted or threatened litigation in response to the
Distribution. In August 1993, the United States District Court approved the
Class Action Settlement. In connection with this settlement, the Company issued
warrants in 1994 to purchase up to 7.7 million shares of Host Marriott common
stock. Such warrants are exercisable for five years from the Distribution Date,
at $8.00 per share during the first three years and $10.00 per share during the
last two years.
A group of bondholders (the "PPM Group"), who purported to have at one time
owned approximately $120 million of Senior Notes, and another group purporting
to hold approximately $7.5 million of Senior Notes, opted out of the Class
Action Settlement. The PPM Group alleged that federal securities laws had been
violated in connection with the sale by the Company of certain series of its
Senior Notes and debentures and claimed damages of approximately $30 million.
The group purporting to hold $7.5 million of Senior Notes settled with the
Company in April 1994. Under the terms of the settlement, the Company
repurchased the Senior Notes at their par value.
In September 1994, the Company settled with certain members of the PPM Group
whose claims represent 40% of the PPM Group's aggregate claims. The claims of
the remainder of the PPM Group went
8
<PAGE>
to trial in September 1994, and in October 1994 the judge declared a mistrial
based on the inability of the jury to reach a verdict. In January 1995, the
judge granted the Company's motion for judgment notwithstanding the verdict to
dismiss the PPM Group's claims as a matter of law. An appeal was filed by the
PPM Group in February 1995.
The Company believes that all claims of the PPM Group are without merit and
that the appeal will not be successful.
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
POTENTIAL CONFLICTS WITH MARRIOTT INTERNATIONAL
The interests of the Company and Marriott International may potentially
conflict due to the ongoing relationships between the companies. In addition,
the Company and Marriott International share two common directors--J.W.
Marriott, Jr. serves as Chairman of the Board of Directors and President of
Marriott International and also serves as a director of the Company, and
Richard E. Marriott serves as Chairman of the Board of Directors of the Company
and will assume the responsibilities as President and Chief Executive Officer
of the Company, effective May 1, 1995, until a replacement for Stephen F.
Bollenbach, current President and Chief Executive Officer of the Company, is
found. Richard E. Marriott also serves as a director of Marriott International.
Messrs. J.W. Marriott, Jr. and Richard E. Marriott, as well as certain other
officers and directors of Marriott International and the Company, also own
shares (and/or options or other rights to acquire shares) in both companies.
With respect to the various contractual arrangements between the two companies,
the potential exists for disagreement as to the quality of services provided by
Marriott International and as to contract compliance. Additionally, the
possible desire of the Company, from time-to-time, to finance, refinance or
effect a sale of any of the properties managed by Marriott International may,
depending upon the structure of such transactions, result in a need to modify
the management agreement with Marriott International with respect to such
property. Any such modification proposed by the Company may not be acceptable
to Marriott International, and the lack of consent from Marriott International
could adversely affect the Company's ability to consummate such financing or
sale. In addition, certain situations could arise where actions taken by
Marriott International in its capacity as manager of competing lodging
properties would not necessarily be in the best interests of the Company.
Nevertheless, the Company believes that there is sufficient mutuality of
interest between the Company and Marriott International to result in a mutually
productive relationship. Moreover, appropriate policies and procedures are
followed by the Board of Directors of each of the companies to limit the
involvement of Messrs. J.W. Marriott, Jr. and Richard E. Marriott (and, if
appropriate, other officers and directors of such companies) in conflict
situations, including requiring them to abstain from voting as directors of
either the Company or Marriott International (or as directors of any of their
subsidiaries) on certain matters which present a conflict between the
companies. See "Relationship Between the Company and Marriott International."
DIVIDEND POLICY
The Company intends to retain future earnings, if any, for use in its
business and does not currently anticipate paying regular cash dividends on the
Common Stock. In addition, the Credit Agreement contains restrictions on the
payment of dividends on the Common Stock. See "Dividend Policy" and
"Financing." The Company has also stated its intention not to pay dividends on
its outstanding Convertible Preferred Stock. The Company has not paid six
quarterly dividend payments since the Distribution on the Convertible Preferred
Stock and, accordingly, the remaining holders of the Convertible Preferred
Stock are entitled to elect two directors of the Company at the 1995 Annual
Meeting of Shareholders. Approximately 258,000 depositary shares, each
representing 1/1000th of a share of Convertible Preferred Stock, were
outstanding as of December 30, 1994. During the period from December 31, 1994
to March 24, 1995, approximately 219,500 depositary shares of Convertible
Preferred Stock were converted into approximately 4.2 million shares of
9
<PAGE>
Common Stock. As of March 24, 1995, approximately 38,500 depository shares
remain outstanding. Commencing January 15, 1996, the outstanding Convertible
Preferred Stock may be redeemed at an aggregate redemption price of
approximately $2 million plus accrued and unpaid dividends.
EFFECTS OF ECONOMIC CONDITIONS AND CYCLICALITY
The Company's ownership of real property, including hotels, and undeveloped
land parcels, is substantial. Real estate values are sensitive to changes in
local market and economic conditions and to fluctuations in the economy as a
whole. There can be no assurance that downturns or prolonged adverse conditions
in real estate or capital markets or the economy as a whole will not have a
material adverse impact on the Company.
ANTITAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation and Bylaws each contain
provisions that will make difficult an acquisition of control of the Company by
means of a tender offer, open market purchases, proxy fight, or otherwise, that
is not approved by the Board of Directors. Provisions that may have an
antitakeover effect include (i) a staggered board of directors with three
separate classes, (ii) a super-majority vote requirement for removal or filling
of vacancies on the Board of Directors and for amendment to the Company's
Restated Certificate of Incorporation and Bylaws, (iii) limitations on
shareholder action by written consent and (iv) super-majority voting
requirements for approval of mergers and other business combinations involving
the Company and interested shareholders. In addition, the Company is subject to
Section 203 of the Delaware General Corporation Law requiring super-majority
approval for certain business combinations. The Company has also adopted a
shareholder rights plan which may discourage or delay a change in control of
the Company. Finally, the Company has granted Marriott International, for a
period of ten years following the Distribution, the right to purchase up to 20%
of each class of the then outstanding voting stock of the Company at the fair
market value thereof upon the occurrence of certain specified events, generally
involving changes in control of the Company (the "Marriott International
Purchase Right"). The Marriott International Purchase Right may have certain
antitakeover effects with respect to the Company. See "Purposes and
Antitakeover Effects of Certain Provisions of the Company Certificate and
Bylaws and the Marriott International Purchase Right" and "Description of
Capital Stock--Rights and Junior Preferred Stock."
LACK OF PUBLIC MARKET FOR THE WARRANTS
The Warrants have no established trading market and no assurance can be given
that any such market will develop or, if one develops, that it will be
sustained. The Company does not intend to apply to list the Warrants on any
stock exchange. If a market for the Warrants does not develop, Warrantholders
may be unable to sell the Warrants for an extended period of time, if at all.
THE COMPANY
The Company is one of the largest owners of lodging properties in the world.
The Company owns 100 lodging properties that are generally operated under
Marriott brand names and managed by Marriott International, formerly a wholly-
owned subsidiary of the Company. The Company is the largest owner of hotels
operated under Marriott brands. The Company also holds minority interests in
various partnerships that own in the aggregate over 260 additional properties
operated by Marriott International. The Company's properties span several
market segments, including full-service (primarily Marriott Hotels, Resorts and
Suites), moderate-priced (Courtyard by Marriott), extended-stay (Residence Inn
by Marriott) and economy (Fairfield Inn by Marriott). These Marriott brands are
among the most respected and widely recognized in the lodging industry. The
Company is also the leading operator of airport and tollroad food, beverage,
and merchandise concessions, with facilities in nearly every major U.S.
commercial airport and on 14 tollroads.
10
<PAGE>
The Company seeks to grow primarily through opportunistic acquisitions of
full-service hotels in the U.S. and abroad. The Company believes that the full-
service segment of the market offers numerous opportunities to acquire assets
at attractive multiples of cash flow and at discounts to replacement value,
including under-performing hotels which can be improved under new management.
The Company believes that the full-service segment, in particular, has
potential for improved performance as the economy continues to improve and as
business travel continues to increase. During 1994, the Company has acquired 15
full-service hotels totalling approximately 6,000 rooms in separate
transactions for approximately $443 million. The Company also provided 100%
financing totalling approximately $35 million to an affiliated partnership, in
which the Company owns the sole general partner interest, for the acquisition
of two full-service hotels (684 rooms). Additionally, the Company acquired a
controlling interest in one 662-room, full-service hotel through an equity
investment of $16 million and debt financing of $36 million (the debt was
subsequently sold in 1995). The Company is continually engaged in discussions
with respect to other acquisition opportunities and, subsequent to year-end,
acquired the 300-room Charlotte Executive Park Marriott Hotel for $15 million.
The Company considers all 19 properties as owned hotels for accounting
purposes.
In 1994, the Company sold 26 of its 30 Fairfield Inns. The Company also sold
its 14 senior living communities in 1994. During the first quarter of 1995, the
Company sold and leased back 21 of its Courtyard properties to a real estate
investment trust (REIT) for $179 million (10% of which is deferred). During the
second quarter of 1995, the Company entered into an agreement to sell and lease
back an additional 17 Courtyards with the REIT for $163 million (10% of which
is deferred). The REIT also has an option to buy and lease back up to 16 of the
remaining Courtyard properties within fifteen months. The leases provide the
Company with the ability to realize a substantial portion of the future cash
flows from these properties. From 50% to 75% of the proceeds from the sale will
be used to pay down publicly-held debt, as required. Subsequent to year-end,
the Company also signed an agreement to sell its four remaining Fairfield Inns.
The Company, through its Operating Group, is also the leading operator of
airport and tollroad food and merchandise concessions, with facilities in most
major commercial airports in the U.S. The Company operates restaurants, gift
shops and related facilities at over 70 airports, on 14 tollroads (including
over 95 travel plazas) and at more than 35 tourist attractions, stadiums and
arenas. Many of the Company's concessions operate under branded names,
including Pizza Hut, Burger King, Taco Bell, Sbarro's, Dunkin' Donuts,
Starbucks, TCBY (The Country's Best Yogurt), Mrs. Fields and Cheers.
The principal executive offices of the Company are located at 10400 Fernwood
Road, Bethesda, Maryland, 20817, and its telephone number is (301) 380-9000.
The Company was incorporated under the laws of the State of Delaware in 1929.
USE OF PROCEEDS
The Warrants were issued as part of the Class Action Settlement, and the
Company did not receive any proceeds from such issuance. The net proceeds to be
received by the Company from the sale of 7,700,000 shares of Common Stock upon
the exercise of the Warrants would be approximately $61.6 million, assuming the
exercise of all Warrants at an exercise price of $8.00 per share and
approximately $77 million, assuming the exercise of all Warrants at an exercise
price of $10.00 per share, before deducting expenses payable by the Company.
Any net proceeds are expected to be used for general corporate purposes.
DIVIDEND POLICY
The Company intends to retain future earnings, if any, for use in its
business and does not currently anticipate paying any regular cash dividends on
the Common Stock. In addition, the Credit Agreement contains restrictions on
the payment of dividends on the Common Stock and the Company's subsidiaries are
subject to certain agreements that limit their ability to pay dividends to the
Company. See "Financing." The
11
<PAGE>
Company has also stated its intention not to pay dividends on its outstanding
Convertible Preferred Stock. The Company has not paid six quarterly dividend
payments since the Distribution on the Convertible Preferred Stock and,
accordingly, the remaining holders of the Convertible Preferred Stock are
entitled to elect two directors of the Company at the 1995 Annual Meeting of
Shareholders. Approximately 258,000 depositary shares, each representing
1/1000th of a share of Convertible Preferred Stock, were outstanding as of
December 30, 1994. During the period from December 31, 1994 to March 24, 1995,
approximately 219,500 depositary shares of Convertible Preferred Stock were
converted into approximately 4.2 million shares of Common Stock. As of March
24, 1995, approximately 38,500 depository shares remain outstanding. Commencing
January 15, 1996, the outstanding Convertible Preferred Stock may be redeemed
at an aggregate redemption price of approximately $2 million plus accrued and
unpaid dividends.
CAPITALIZATION OF THE COMPANY
The following table sets forth the capitalization of the Company at December
30, 1994 and the capitalization of the Company as adjusted to give effect to
the exercise of all Warrants, as if all such exercises had occurred on December
30, 1994. The capitalization of the Company should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 30, 1994
---------------------------
ACTUAL AS ADJUSTED(1)
------ --------------
(UNAUDITED, IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents........................ $ 95 $ 156
====== ======
Debt............................................. $2,259 $2,259
Shareholders' equity............................. 710 771
------ ------
Total Capitalization........................... $2,969 $3,030
====== ======
</TABLE>
- --------
(1) Reflects receipt of proceeds from the exercise of all Warrants, after
deducting estimated expenses, assuming an exercise price for each Warrant
of $8.00. See "Use of Proceeds." Assuming an exercise price for each
Warrant of $10.00, the cash and cash equivalents, and shareholders' equity,
of the Company would be $171 million and $786 million, respectively.
12
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited Pro Forma Condensed Consolidated Balance Sheet and Income
Statement of the Company as of and for the year ended December 30, 1994 reflect
the following transactions:
. 1994 addition of 18 full-service properties
. 1994 sale of 14 senior living communities
. 1994 sale of 26 Fairfield Inns
. 1995 sale/leaseback of 21 Courtyard properties
. Probable 1995 sale/leaseback of 17 Courtyard properties
The "Host Marriott Corporation Pro Forma" column of the unaudited Pro Forma
Condensed Consolidated Balance Sheet presents the financial position of the
Company as if the sale/leaseback of the 21 Courtyard properties and the
probable sale/leaseback of 17 additional Courtyard properties had been
completed as of December 30, 1994. The 18 full-service hotel additions, the
sale of the 14 senior living communities, and the sale of 26 Fairfield Inns
were completed prior to December 30, 1994 and already have been reflected in
the Company's historical balance sheet. The unaudited Pro Forma Condensed
Consolidated Statement of Income of the Company for the year ended December 30,
1994 presents, in the "Host Marriott Corporation Pro Forma" column, the results
of operations of the Company as if all of the transactions described above had
been completed as of January 1, 1994. The adjustments required to reflect the
transactions are set forth in the "Acquisition Pro Forma Adjustments" column
and the "Disposition Pro Forma Adjustments" column and discussed in the
accompanying notes.
The Pro Forma Condensed Consolidated Financial Data of the Company are
unaudited and presented for informational purposes only and may not reflect the
Company's future results of operations and financial position or what the
results of operations and financial position of the Company would have been had
such transactions occurred as of the dates indicated. The unaudited Pro Forma
Condensed Consolidated Financial Data and Notes thereto of the Company should
be read in conjunction with the Host Marriott Corporation Consolidated
Financial Statements and Notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained elsewhere in this
Prospectus.
13
<PAGE>
HOST MARRIOTT CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 30, 1994
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
HOST MARRIOTT DISPOSITION HOST MARRIOTT
CORPORATION PRO FORMA CORPORATION
HISTORICAL ADJUSTMENTS PRO FORMA
------------- ----------- -------------
ASSETS
<S> <C> <C> <C>
Property and Equipment................ $3,156 $(331)(A) $2,825
Investments in Affiliates............. 203 -- 203
Notes Receivable...................... 50 -- 50
Accounts Receivable................... 102 -- 102
Inventories........................... 40 -- 40
Other Assets.......................... 176 26 (A) 202
Cash and Cash Equivalents............. 95 300 (A) 169
(226)(B)
------ ----- ------
$3,822 $(231) $3,591
====== ===== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Debt carrying a company guarantee of
repayment.......................... $1,495 $(226)(B) $1,269
Debt not carrying a company guaran-
tee of repayment................... 764 -- 764
------ ----- ------
2,259 (226) 2,033
Accounts Payable and Accrued Expenses. 208 -- 208
Deferred Income Taxes................. 453 -- 453
Other Liabilities..................... 192 (5)(A) 187
------ ----- ------
Total Liabilities................. 3,112 (231) 2,881
------ ----- ------
Shareholders' Equity
Convertible Preferred Stock......... 13 -- 13
Common Stock, 300 million shares
authorized; 153.6 million shares
issued and outstanding............. 154 -- 154
Additional Paid-in Capital.......... 479 -- 479
Retained Earnings................... 64 -- 64
------ ----- ------
Total Shareholders' Equity........ 710 -- 710
------ ----- ------
$3,822 $(231) $3,591
====== ===== ======
</TABLE>
14
<PAGE>
HOST MARRIOTT CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED, IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 30, 1994
-----------------------------------------------------
HOST MARRIOTT ACQUISITION DISPOSITION HOST MARRIOTT
CORPORATION PRO FORMA PRO FORMA CORPORATION
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues
Real Estate Group........ $ 360 $ 59 (C) $(84)(F) $ 337
2 (G)
Operating Group.......... 1,141 -- -- 1,141
------ ---- ---- ------
1,501 59 (82) 1,478
------ ---- ---- ------
Operating costs and ex-
penses
Real Estate Group........ 213 27 (C) (36)(F) 204
Operating Group.......... 1,097 -- -- 1,097
------ ---- ---- ------
1,310 27 (36) 1,301
------ ---- ---- ------
Operating profit
Real Estate Group........ 147 32 (46) 133
Operating Group.......... 44 -- -- 44
------ ---- ---- ------
Operating profit before
corporate expenses and
interest.............. 191 32 (46) 177
Corporate expenses......... (37) -- -- (37)
Interest expense........... (206) (9)(D) 23(B) (168)
24(H)
Interest income............ 29 (5)(C) -- 24
------ ---- ---- ------
Income (loss) before income
taxes and extraordinary
item...................... (23) 18 1 (4)
(Provision) benefit for in-
come taxes................ 4 (6)(E) (1)(E) (3)
------ ---- ---- ------
Net income (loss) before
extraordinary item........ (19) 12 -- (7)
Dividends on preferred
stock..................... -- -- -- --
------ ---- ---- ------
Income (loss) available for
common stock before
extraordinary item........ $ (19) $ 12 $-- $ (7)
====== ==== ==== ======
Earnings (loss) before
extraordinary item per
common share.............. $ (.13) $ (.05)
====== ======
Weighted average number of
common shares outstanding. 151.5 1.0 (I) 152.5
====== ==== ======
</TABLE>
15
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
A. Represents the adjustment to record the 1995 sale/leaseback of 21 Courtyard
properties and the probable 1995 sale/leaseback of 17 additional Courtyard
properties.
B. Represents the paydown of the New Notes with 75% of the net sales proceeds
from the sale/leaseback of the 21 Courtyard properties and the probable
sale/leaseback of the 17 additional Courtyard properties and the
corresponding impact on interest expense. Extraordinary losses of
approximately $6 million related to the redemption of New Notes are not
reflected in the accompanying Pro Forma Condensed Consolidated Financial
Data.
C. Represents the adjustment to reflect the incremental increase in revenues
and operating costs for the 1994 addition of 18 full-service properties, as
if they were acquired on January 1, 1994, mainly utilizing proceeds from
the common stock offering and the $230 million acquisition credit facility,
and the related decrease in interest income.
D. Represents the increase in interest expense on the $168 million borrowing
under the $230 million acquisition credit facility utilized for the
acquisition of full-service hotels.
E. Represents the income tax impact of pro forma adjustments, at statutory
rates.
F. Represents the adjustment to eliminate the revenues and operating costs of
the 38 Courtyard properties, 26 Fairfield Inns, and 14 senior living
communities.
G. Represents the adjustment to record the net rental income from the lease of
the 38 Courtyard properties.
H. Represents the adjustment to reduce interest expense for the paydown of New
Notes and other debt as of January 1, 1994 with the net sales proceeds from
the 26 Fairfield Inns and 14 senior living communities. Extraordinary
losses for 1994 totalling approximately $6 million, net-of-taxes, related
to the redemption of these New Notes are not reflected in the accompanying
Pro Forma Condensed Consolidated Financial Data.
I. Represents the adjustment to increase the weighted average number of common
shares outstanding for the common stock issuance as of January 1, 1994.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
As described in Part I, Items 1 & 2, "Business and Properties", the Company's
assets, liabilities and business operations substantially changed when the
Company completed the Distribution, Exchange Offer and Restructuring on October
8, 1993. Because of these changes, the fiscal year 1994 historical consolidated
financial statements differ substantially compared to the 1993 and 1992
historical consolidated financial statements.
Management believes that it is more meaningful and relevant in understanding
the present and ongoing Company operations to compare the Company's historical
1994 operating results to the pro forma results for 1993 and to compare the pro
forma operating results for 1993 to the pro forma operating results for 1992.
Accordingly, the Company's pro forma consolidated statements of operations for
fiscal 1993 and 1992 are presented below. These pro forma consolidated
statements of operations were prepared as if the Distribution, Exchange Offer,
Restructuring and the implementation of the various related agreements entered
into with Marriott International, including the lodging management and senior
living community leases, occurred at the beginning of each period and include
only the operations of the businesses retained by the Company, and exclude,
among other items, certain non-recurring costs, accounting changes and
extraordinary losses. See the notes to the consolidated financial statements
for discussion of the Distribution, Exchange Offer, Restructuring and the
related transactions and agreements. These pro forma consolidated statement of
operations do not include the impact of the transactions discussed in the "Pro
Forma Condensed Consolidated Financial Data" on Pages 13 to 16 of this
Prospectus.
The following pro forma consolidated statements of operations for 1993 and
1992 and the management's discussion and analysis related thereto are presented
in the format that the Company adopted as of January 1, 1994 and reflect the
impact of the Distribution and related transactions. This format breaks down
the Company's operations into the Real Estate Group, consisting of the results
of all of the Company's owned hotel properties and senior living communities,
as well as its partnership investments and investments in certain other
financial assets, and the Operating Group, consisting of food, beverage and
merchandise operations at airports, travel plazas and other locations. These
pro forma consolidated statements of operations do not purport to be indicative
of results which may occur in the future.
17
<PAGE>
The following 1994 historical and 1993 and 1992 pro forma consolidated
statements of operations and related analysis should be read in conjunction
with the Company's consolidated financial statements and notes thereto included
elsewhere in this Prospectus:
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL (UNAUDITED)
---------- --------------
1994 1993 1992
---------- ------ ------
(IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Real Estate Group
Hotels.......................................... $ 340 $ 251 $ 239
Senior living communities....................... 14 23 21
Net gains(losses) on property transactions...... 6 (1) 3
------ ------ ------
360 273 263
------ ------ ------
Operating Group
Airports........................................ 747 690 566
Travel Plazas................................... 304 296 279
Other........................................... 90 95 90
------ ------ ------
1,141 1,081 935
------ ------ ------
Total revenues................................ 1,501 1,354 1,198
------ ------ ------
Operating Costs and Expenses
Real Estate Group
Hotels.......................................... 200 157 151
Senior living communities....................... 5 12 10
Other........................................... 8 25 21
------ ------ ------
Operating Group 213 194 182
------ ------ ------
Airports........................................ 712 659 523
Travel Plazas................................... 292 282 261
Other (including restructuring charges of $7
million in 1993)............................... 93 97 94
------ ------ ------
1,097 1,038 878
------ ------ ------
Total operating costs and expenses.............. 1,310 1,232 1,060
------ ------ ------
Operating Profit
Real Estate Group................................. 147 79 81
Operating Group................................... 44 43 57
------ ------ ------
Operating profit before corporate expenses and
interest....................................... 191 122 138
Corporate expenses................................ (37) (28) (24)
Interest expense.................................. (206) (190) (198)
Interest income................................... 29 26 28
------ ------ ------
Loss before income taxes, extraordinary item and
accounting changes............................... (23) (70) (56)
Benefit for income taxes.......................... 4 10 19
------ ------ ------
Loss before extraordinary item and accounting
changes (1)(2)(4)................................ $ (19) $ (60) $ (37)
------ ------ ------
Loss per common share before extraordinary item
and accounting changes........................... $ (.13) $ (.51) $ (.33)
------ ------ ------
Weighted average shares outstanding (3)........... 151.5 116.7 112.2
====== ====== ======
</TABLE>
18
<PAGE>
- --------
(1) Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" was adopted in the first fiscal quarter of 1993. In the second
quarter of 1993, the Company changed its accounting method for assets held
for sale. See the notes to the consolidated financial statements included
elsewhere in this Prospectus.
(2) The Company recognized a $5 million, net-of-taxes, extraordinary loss on
the completion of the Exchange Offer in 1993. See Note 2 to the
consolidated financial statements included elsewhere in this Prospectus.
(3) 1993 and 1992 pro forma weighted average shares are based on weighted
average common shares of Marriott Corporation adjusted to reflect (i) the
conversion of Marriott Corporation preferred stock into 10.6 million shares
of common stock prior to the Distribution, and (ii) the issuance by
Marriott Corporation of 1.8 million shares of its common stock, prior to
the Distribution, in connection with the refinancing of certain of its
senior debt.
(4) The Company recognized a $6 million, net-of-taxes, extraordinary loss on
the redemption of bonds in 1994. See Note 8 to the consolidated financial
statements included elsewhere in this Prospectus.
19
<PAGE>
1994 Compared to Pro Forma 1993
The Company reported 1994 revenues of $1,501 million, a $147 million or 11%
improvement over pro forma 1993 results. Operating profit increased $69
million, or 57%, to $191 million in 1994. The Real Estate Group posted a
significant increase in operating profit--up $68 million over pro forma 1993
results to $147 million, while the Operating Group posted a $1 million increase
to $44 million. The 1994 loss before extraordinary item and accounting changes
decreased $41 million, or 68%, to $19 million ($.13 per share) over pro forma
1993 results.
The Real Estate Group posted a 32% increase in revenues in 1994 to $360
million. Operating profit increased 86% over 1993 pro forma results. The
revenue and operating profit increases are primarily due to improved lodging
results and the addition of 18 full-service hotel properties during 1994,
coupled with a reduction in equity losses on the Company's partnership
investments, mainly due to the consolidation of the partnership owning the New
York Marriott Marquis Hotel (Times Square) on December 31, 1993, offset by the
impact of the 1994 sales of the senior living communities and 26 of the 30
Fairfield Inns. The increase in operating profit was also aided by certain non-
recurring items, including real estate tax refunds and manager-initiated cost
reductions.
Hotel revenues for the Real Estate Group increased $89 million to $340
million year-to-date over pro forma 1993 amounts, as all four of the Company's
lodging concepts reported growth in room revenues generated per available room
("REVPAR") for comparable units. In addition to the 1994 hotel acquisitions and
the Times Square consolidation, other non-comparable hotel transactions include
the 1994 sale of 26 Fairfield Inns in the third quarter and the 1993 sale of 11
Residence Inns near year-end. Excluding the impact of these non-comparable
items, hotel revenues increased $31 million (14%). Operating profit increased
$23 million (31%) over pro forma 1993 levels on a comparable basis.
Overall revenues and operating profits for the Company's full-service hotels,
resorts, and suites were improved or comparable to 1993 results with the
exception of the Miami Airport Marriott Hotel which achieved very high
occupancy levels in early 1993 resulting from Hurricane Andrew in 1992.
Improved results were driven by strong improvements in REVPAR. The Company's
full-service hotels posted a 7% increase in REVPAR for comparable units.
Average occupancy climbed over one percentage point for comparable units, while
average room rates increased 5%. Full-service hotel operating profit increases
were partially offset by an overall 56% increase in depreciation expense from
the New York Marriott Marquis and the 18 properties added in 1994.
The Company's moderate-priced lodging concept, Courtyard, reported
significant increases in operating profit in 1994 primarily due to REVPAR
increases. Courtyard's REVPAR increased 8%, fueled by a 7% increase in average
room rates and a one percentage point increase in average occupancy.
Residence Inn, the Company's extended-stay lodging concept, also reported
significant increases in operating profit in 1994 due to REVPAR increases.
Residence Inn's REVPAR increased 8% for comparable units due primarily to an
increase in average room rates of 7%, combined with a one percentage point
increase in average occupancy.
On August 5, 1994, the Company sold 26 of its Fairfield Inns to an unrelated
party for net proceeds of $114 million. Prior to their sale, year-to-date
revenues and operating profit were comparable to the prior year. Year-to-date
revenues and operating profit for the four remaining Fairfield Inns were
comparable to the 1993 pro forma amounts.
Senior living communities' revenues consist of rentals earned under the lease
agreements with Marriott International. During the first quarter of 1994, the
Company executed an agreement to sell all of its senior living communities to
an unrelated party for $320 million, which approximated the communities'
carrying value. The sale of the communities was completed during the second and
third quarters of 1994. Prior to
20
<PAGE>
their sales, year-to-date revenues and operating profit for senior living
communities were comparable to fiscal year 1993.
The Operating Group generated a $60 million, or 6%, revenue increase in 1994
to $1,141 million. Airport concessions drove the strong performance reflecting
a 7% enplanement growth during the year and benefiting from flight delays
earlier in the year during severe winter weather. Airport revenues increased
$57 million, or 8%, to $747 million in 1994. Travel Plazas' units posted modest
increases in sales over last year primarily from the completion of plazas on
one tollroad.
During 1994, the Operating Group was awarded new contracts in such key
airports as Atlanta and Washington-Dulles and expanded its international
presence by commencing operations at the Vancouver, British Columbia airport.
At the same time, the Operating Group has, on a selective basis, elected to
reduce or end its involvement in certain contract situations where continuing
involvement was not economically justified. The Operating Group has also
undertaken a number of cost control initiatives, including the organizational
restructuring announced in late 1993, which has achieved its profitability
objectives.
The Operating Group's cost structure was negatively impacted in 1994 by
increasing contractual rentals on certain existing contracts, increasing
participation by local and minority-owned business enterprises and higher
employee costs.
Due to favorable claims experience for the general liability and workers'
compensation self-insurance programs, the Company reduced its related
actuarially estimated reserves by $8 million in 1994, which is reflected as a
reduction in the Operating Group's operating costs and expenses.
In June 1994, the Company transferred its rights under an unprofitable
concessions contract to a third party. In connection with the decision to
discontinue servicing the contract, the Company wrote off related assets of
approximately $8 million and established a reserve of approximately $4 million
for amounts which are to be paid to the third party transferee over the next
six years. Management believes the transfer of this contract will have a
positive impact on future earnings and cash flow.
On a pro forma basis, Corporate expenses increased $9 million, to $37
million, due to employee restricted stock award expenses and higher
administrative costs.
Interest expense increased by 8% to $206 million in 1994 due to the
consolidation of the partnership owning the New York Marriott Marquis and the
impact of rising interest rates on the Company's floating rate debt and
interest rate swap agreements, partially offset by the impact of bond
redemptions in the second half of 1994.
During 1994, the Company redeemed approximately $292 million of New Notes at
their face value. In connection with the redemptions, the Company recognized an
extraordinary loss of $6 million, net of taxes of $3 million, representing the
excess of the redemption price over their net carrying value. The net loss for
1994 was $25 million, or $.17 per share.
Pro Forma 1993 Compared to Pro Forma 1992
The Company reported a pro forma loss before extraordinary item and
accounting changes in 1993 of $60 million, versus the 1992 pro forma loss of
$37 million. Comparisons of the pro forma 1993 results to the preceding year
were affected by the following items:
. The $10 million pre-tax gain recorded in 1993 from the sale of the
Company's 15% interest in the partnership owning the Boston Copley
Marriott Hotel.
. The $11 million pre-tax charge recorded in 1993 to write down the
carrying value of Fairfield Inns held as available for sale.
21
<PAGE>
. The restructuring costs of $7 million, pre-tax, recorded in 1993 as a
result of the reorganization of the Operating Group.
. The effect on the income tax provision in 1993 resulting from the
increase in corporate income tax rates due to tax legislation.
Excluding the impact of these items, the loss before extraordinary item and
accounting changes was relatively unchanged between years.
Hotel revenues represent house profit which is hotel operating results less
property-level expenses, excluding depreciation, property taxes, ground rent
expense, insurance and management fees. As described in Note 1 to the
consolidated financial statements, subsequent to the Distribution, the Company
does not report the gross operations of the individual hotels but, rather, the
net results which are distributed to it in accordance with the terms of the
management agreements. Revenues and operating costs and expenses have been
reclassified in the pro forma operating data to reflect those operations
consistently with the new policy. Pro forma hotel revenues increased 5% from
$239 million in 1992 to $251 million in 1993 due to (i) the combined increase
in room revenues generated per available room (REVPAR) for comparable
properties of approximately 7% and (ii) higher house profit margins offset by
the sale of seven properties in mid-1992.
Hotel operating profits increased 7% over 1992 to $94 million as a result of
increased revenues, as discussed above, offset by higher ground rent expense
and management fees tied to improved property performance. Excluding the impact
of the Fairfield Inn write-down in 1993, the sale of seven full-service hotels
and 13 Courtyard hotels in 1992 and higher deferred gain amortization in 1992,
the Real Estate Group's operating profit increased 29% to $90 million in 1993.
Senior living community revenues consist of rentals earned under the lease
agreements with Marriott International. The terms of the leases call for annual
payments of $28 million (with all 14 properties fully operational) plus a
percentage of certain annual revenues from operation of the facilities in
excess of $72 million on a combined basis. The increase in pro forma revenues
is due to the opening of additional properties through 1993 and the
corresponding commencement of the rental payments for such properties.
Operating profits for senior living communities represent rentals less
depreciation expense. The increase in operating profits for these senior living
communities in 1993 is in direct relation to their increase in revenues.
Net gains (losses) on property transactions consists of gains and losses on
the sale of real estate or financial assets. Included, as well, are write-downs
in connection with other property-related transactions. Such transactions are
included in lodging operating profit in the Company's historical consolidated
financial statements with respect to owned hotel transactions and corporate
expenses with respect to partnership and other financial asset transactions. In
1993, profits were earned from the sales of the Company's interests in the
Boston Copley Marriott and The Jefferson senior living community condominium
units and were reduced by the charge recorded to write down the carrying value
of certain Fairfield Inns held for sale and by certain partnership
transactions. The amount of net gain on property transactions in 1992 primarily
consisted of gains on the sales of condominium units at The Jefferson.
Included in Other Expenses for the Real Estate Group are the net equity in
earnings for the Company's equity investments in partnerships and the carrying
costs of the Company's undeveloped land parcels. Such expenses are included in
Corporate expenses in the Company's historical consolidated financial
statements. There was an increase in these expenses to $25 million in 1993,
principally from an increase in the proportion of losses recorded for the New
York Marriott Marquis partnership.
Revenues for the Operating Group grew by 16% in 1993 to $1,081 million,
mainly due to the acquisition of 32 Dobbs contracts in September 1992.
Operating profit for the Operating Group was down 12% from the prior year to
$43 million excluding restructuring charges of $7 million, despite higher
revenues. This decline
22
<PAGE>
was due to (i) higher employee benefit costs, (ii) reduced operating
efficiencies as locally and minority-owned business participation reduced
market share and (iii) higher rents and depreciation expense for certain
contracts. Depreciation increased $13 million (24%) on higher asset balances,
principally from the Dobbs contract acquisitions.
During the fourth quarter of 1993, the Company recorded a $7 million pre-tax
restructuring charge for the costs of redesigning its operating structure. Such
costs represent $4 million of severance and relocation payments, a $2.5 million
write-off of developments costs for a data processing system no longer required
under the new organization structure and $500,000 of other charges. Most of
these expenditures were incurred in the first quarter of 1994. The Company
expects to realize improved operating profits of approximately $2 million
annually as a result of the restructuring.
Corporate expenses include executive management and administrative costs. On
a pro forma basis, these costs were up $4 million in 1993 to $28 million,
principally due to increased minority interest expense and higher
administrative costs.
Interest expense decreased by 4% to $190 million in 1993 due to the paydown
in debt from the proceeds of hotel sales in 1992 and other asset sales
occurring in late 1993. Declining interest rates on variable rate debt also had
a favorable impact on interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of operating
cash flow, debt and equity financing, and proceeds from sales of selected
properties and other assets. The Company utilizes these sources of capital to
acquire new properties, fund capital additions and improvements, and make
principal payments on debt.
The Company believes that the financial resources generated from ongoing
operations, as well as funds available from other sources and the cash and cash
equivalent balances at December 30, 1994, will be sufficient to enable it to
meet its debt service and capital expenditure needs for the foreseeable future.
However, certain events, such as significant acquisitions, would require
additional debt or equity financing.
Capital Transactions. In January 1994, the Company raised $230 million of net
proceeds from the sale of 20.1 million shares of common stock. Additionally,
the Company obtained a revolving line of credit (the "Revolver") for up to $230
million with a group of commercial banks for the acquisition of full-service
hotels. At December 30, 1994, $168 million was outstanding under the Revolver.
The common stock and Revolver proceeds were, and the remaining proceeds will
continue to be, utilized to fund the acquisition of full-service hotel
properties.
The Company owns a portfolio of real estate which can be used to secure new
financings or be sold. Property and equipment totalled $3.2 billion at December
30, 1994, $1.7 billion of which had not been pledged or mortgaged. As the
Company continues to execute its strategy of acquiring full-service hotels, it
may engage in additional capital transactions from time to time as market
conditions permit or funds are required for a particular use. Such capital
transactions may be in the form of additional stock offerings, or the Company
may secure long-term financing and (subject, among other things, to compliance
with its existing debt agreements, including requirements to use the proceeds
of certain refinancings to repay indebtedness) may use unencumbered assets as
security for future financings, if such financings are determined to be
advantageous.
There are no plans to pay regular cash dividends on the Company's common or
preferred stock in the near future, and the Company is prohibited from doing so
on its common stock while amounts are outstanding under its Line of Credit with
Marriott International.
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<PAGE>
The Company intends to evaluate the strategic fit of its Operating Group with
the Company's real estate operations and may examine possible alternatives for
restructuring of the relationship between these two businesses. Such
possibilities could include (among other things) the separate financing of the
Operating Group and/or the potential spin-off of the Operating Group. However,
it is also possible that the Company will determine not to pursue any such
course of action.
Asset Dispositions. The Company may, from time to time, consider
opportunities to sell certain of its real estate properties if price targets
can be achieved. During the second and third quarters of 1994, the Company sold
14 senior living communities to an unrelated party for $320 million, which
approximated the communities' carrying value. Additionally, during the third
quarter of 1994, the Company sold 26 of its Fairfield Inns to an unrelated
party. The net proceeds from the sale of the hotels was approximately $114
million, which exceeded the carrying value of the hotels by approximately $12
million, and such excess has been deferred. Approximately $27 million of the
Fairfield Inn proceeds was payable in the form of a note from the purchaser.
The Company sold 15 undeveloped land parcels during 1994 for proceeds of
approximately $23 million.
Subsequent to year-end, the Company entered into a sale/leaseback agreement
with a real estate investment trust (REIT) for 21 of the Company's Courtyard
properties for $179 million (10% of which is deferred), with an option to buy
and lease back up to 33 of the remaining Courtyard properties within one year.
From 50% to 75% of the proceeds from these sales will be used to paydown
publicly-held debt, as required.
In cases where the Company has made a decision to dispose of particular
properties, the Company assesses impairment of each individual property to be
sold on the basis of expected sales price less estimated costs of disposal.
Otherwise, the Company assesses impairment of its real estate properties based
on whether it is probable that undiscounted future cash flows from such
properties will be less than their net book value. As previously discussed, the
Company recorded an $11 million charge in the fourth quarter of 1993 to write-
down 15 individual Fairfield Inn properties to their net realizable value,
although the overall sales transaction generated a net gain.
Capital Acquisitions, Additions and Improvements. The Company seeks to grow
primarily through opportunistic acquisitions of full-service hotels. The
Company believes that the full-service segment of the market offers
opportunities to acquire assets at attractive multiples of cash flow and at
discounts to replacement value, including under-performing hotels which can be
improved under new management. During 1994, the Company acquired 15 full-
service hotels totalling approximately 6,000 rooms for approximately $443
million. The Company also provided 100% financing totalling approximately $35
million to an affiliated partnership, in which the Company owns the sole
general partner interest, for the acquisition of two full-service hotels
(totalling another 684 rooms). Additionally, the Company acquired a controlling
interest in one 662-room, full-service hotel through an equity investment of
$16 million and debt financing of $36 million (the debt was subsequently sold
in 1995). The Company is continually engaged in discussions with respect to
other acquisition opportunities and, subsequent to year-end, acquired the 300-
room Charlotte Executive Park Marriott Hotel for $15 million. The Company
considers all 19 of these properties as owned hotels for accounting purposes.
For certain full-service properties, the Company is required under the terms
of its management agreements to fund escrow accounts for the purpose of keeping
its properties in good condition. These escrow accounts are funded at a rate of
3% to 6% of gross hotel sales and typically cover all the capital needs of the
properties, including major guest room and common area renovations which occur
every five to six years. The Company anticipates spending approximately $50
million to $60 million annually on the renovation and refurbishment of the
Company's existing lodging properties.
The Company recently completed the construction of the 1,200-room
Philadelphia Marriott Hotel, which opened on January 27, 1995. The construction
costs of the Hotel were funded 60% through a loan
24
<PAGE>
from Marriott International totalling $88 million at December 30, 1994. A
second hotel in Philadelphia, the 419-room Philadelphia Airport Marriott Hotel,
is currently under construction and is scheduled to open in December 1995. The
Airport Hotel is principally financed from the $40 million of proceeds from an
industrial development financing bond. Unused proceeds of this financing at
December 30, 1994 are in an escrow fund totalling $17 million and will be used
to pay construction costs as incurred. The Company is also constructing a 300-
room Residence Inn in Pentagon City, Virginia, scheduled for completion in
early 1996. Capital expenditures for these three hotels totalled $104 million
in 1994 and $60 million in 1993. The remaining costs of construction for these
hotels will be funded from operating cash flow or from borrowings.
The Operating Group invests to maintain and enhance its facilities under
existing contracts and as a condition to extending or acquiring new contracts.
The Operating Group generally expends up to $50 million annually for such
items. During 1994, the Company incurred approximately $40 million of such
costs.
In September 1992, the Company acquired 32 Dobbs House concession contracts
at 19 airports for approximately $47 million. In addition, during 1993, the
Company acquired the National Airport concession contract in Washington, D.C.
for $9 million.
Debt Payments. At December 30, 1994, the Company had outstanding $1.1 billion
in senior notes bearing interest at an average rate of approximately 10.2%. The
Company is also obligated on approximately $431 million of other recourse debt.
Included in this other debt is the $163 million outstanding balance of the Line
of Credit provided by Marriott International which bears interest at LIBOR plus
4% and the $168 million outstanding balance of the Revolver which bears
interest based on LIBOR plus 1.75% at December 30, 1994.
Required amortization of these corporate obligations is generally limited to
$278 million over the next five years. However, to the extent that certain
asset sales or financings take place, certain senior notes are required to be
repaid to the extent of 50% to 75% of certain asset sales and 100% of
refinancing proceeds. During 1994, the Company redeemed approximately $292
million of senior notes from the proceeds of asset sales. Based on net proceeds
from qualifying asset sales from December 31, 1994 through March 24, 1995, the
Company has initiated the process for redemption of $82 million of New Notes
and has initiated an offer to repurchase up to an additional $41 million of New
Notes in the second quarter of 1995. The Company will make further redemptions
and offers to repurchase as and when necessary based on future net proceeds
from qualifying asset sales. The Company may also from time-to-time make open
market purchases of its debt securities, including the New Notes, to the extent
such purchases are viewed as an attractive use of available cash. During 1994,
the Company purchased $15 million of senior notes on the open market with
excess cash from operations. Beginning in 1995, the Line of Credit with
Marriott International requires payments to the extent of certain available
excess cash flow, as defined.
The remainder of the Company's debt ($764 million) is secured by specific
hotel properties and has been classified as "Debt Not Carrying a Company
Guarantee." Payments on this debt generally come solely from the specific cash
flows generated by the related assets, and the lender is limited to seizure of
the asset as its sole recourse in the case of non-payment or other defaults.
Maturities over the next five years total $378 million, comprised principally
of the maturity of the mortgage on the New York Marriott Marquis in 1998.
During 1994, the Company reduced its total debt outstanding from $2,479
million at December 31, 1993 to $2,259 million at December 30, 1994. The
Company's ratio of debt to total assets decreased to 59% in 1994 from 64% in
1993.
The Company is also party to five interest rate exchange agreements with
notional amounts of $100 million each. These agreements with Citibank, N.A. New
York, First National Bank of Chicago, and Salomon Brothers (the contracting
parties) require the Company to pay interest based on specified floating rates
of one to six month LIBOR (average rate of 6.7% at December 30, 1994) and
collect interest at fixed rates (average rate of 7.6% at December 30, 1994).
The Company realized a net reduction of interest expense
25
<PAGE>
of $11 million in 1994 and $21 million in 1993 and 1992, respectively, related
to the interest rate exchange agreements. One $100 million swap agreement
expires in May 1995 and the remaining agreements expire in 1997. The Company
monitors the credit worthiness of its contracting parties by evaluating credit
exposure and referring to the ratings of widely accepted credit rating
services. The Standard and Poors' long-term debt ratings for the contracting
parties are all BBB+ or better. The Company is exposed to credit loss in the
event of non-performance by the contracting parties; however, the Company does
not anticipate non-performance by the contracting parties.
Lodging Properties Formerly Held For Sale. Historically and prior to the
Distribution, the Company developed and sold lodging properties to syndicated
limited partnerships, while continuing to operate the properties under long-
term agreements. Those agreements provided the Company with specified
percentages of sales and operating profits as compensation for operating the
properties for the owners.
Most lodging properties developed by the Company since the early 1980s were
reported as assets held for sale prior to 1992. The Company used this
classification because the sale of newly-developed lodging properties, subject
to long-term operating agreements, was the principal method of financing the
Company's lodging property development during this period. Sales of such
properties also enabled the Company to transfer the risk of real estate
ownership. Most of these properties were in the Company's Courtyard, Fairfield
Inn and Residence Inn brands, and were sold in large groups with a balanced
geographical mix of properties of the same brand.
In April 1992, as a result of continuing unfavorable conditions in the real
estate markets, the Company decided it was no longer appropriate to view such
sales of lodging properties as a primary means of long-term financing.
Accordingly, the Company discontinued classification of these properties as
assets held for sale.
During the period the Company classified lodging properties as assets held
for sale, it determined the net realizable value of such assets on a property-
by-property basis in the case of full-service hotels, resorts and suites, and
on an aggregate basis, by brand, in the case of its limited service (i.e.,
Courtyard, Fairfield Inn and Residence Inn) lodging properties. On this basis,
carrying value of these properties was not in excess of their net realizable
value based on estimated selling prices, although, as a result of deteriorating
market conditions, certain individual properties within a limited service brand
had carrying values in excess of their estimated selling prices. In certain
cases, these unrealized losses related to properties constructed during 1990
and 1991 where total development and construction costs exceeded net realizable
value. Following the reclassification of these properties, the Company assesses
impairment of its owned real estate properties based on whether it is probable
that undiscounted future cash flows from such properties will be less than
their net book value.
Beginning in the second fiscal quarter of 1993, under a new accounting policy
adopted by the Company, net realizable value of assets held for sale are
determined on a property-by-property basis as to all lodging properties,
whereas formerly such determination was made on an aggregate basis by hotel
brand as to Courtyard hotels, Fairfield Inns and Residence Inns. The after-tax
cumulative effect of this change on years prior to 1993 of $32 million was
recorded in the quarter ended June 18, 1993. The reduction in the annual
depreciation charge as a result of this change did not have a material effect
on 1993 results of operations.
Partnership Activities. The Company serves as general partner or the managing
general partner of numerous limited partnerships which own hotels. Debt of the
hotel limited partnerships is typically secured by first mortgages on the
properties and generally is nonrecourse to the partnership and the partners.
However, the Company has committed to advance amounts to these affiliated
limited partnerships, if necessary, to cover certain future debt service
requirements. Such commitments were limited, in the aggregate, to $236 million
at December 30, 1994. Funding under these guarantees amounted to $2 million in
1994.
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<PAGE>
Line of Credit. An additional source of liquidity for the Company is the $630
million Line of Credit from Marriott International available through 2007. As
of December 30, 1994, $163 million was outstanding under the Line of Credit.
Once the New Notes' balance is reduced to $630 million, the total amount
available under the Line of Credit is reduced by an amount equal to New Note
redemptions.
Leases. The Company leases certain property and equipment under non-
cancelable operating leases. Leases related to the Company's Real Estate Group
include long-term ground leases for certain hotels, generally with multiple
renewal options. Leases related to the Company's Operating Group generally do
not have renewal or extension provisions.
Certain leases contain provisions for the payment of contingent rentals based
on a percentage of sales in excess of stipulated amounts. Certain leases also
contain contractual rental payment increases throughout the term of the lease.
The minimum rent increases are amortized over the term of the lease on a
straight-line basis. The Company remains contingently liable on certain leases
related to divested properties. Management considers the likelihood of any
substantial funding related to these leases to be remote.
Inflation. The Company's lodging properties are impacted by inflation through
its effect on increasing costs and on the operator's ability to increase room
rates. Unlike other real estate, hotels have the ability to change room rates
on a daily basis, so the impact of higher inflation can be passed on to
customers.
The Operating Group expenses are similarly impacted by inflation. While price
increases can be instituted as inflation occurs, many contracts require
landlord approval before prices can be increased. Over time, this should not
inhibit the Company's ability to raise prices and sustain profitability.
A substantial portion of the Company's debt bears interest at fixed rates.
This debt structure largely mitigates the impact of changes in the rate of
inflation on future interest costs. However, the Company does participate in
five interest rate swap agreements aggregating $500 million with Citibank, N.A.
New York, First National Bank of Chicago, and Salomon Brothers. Under these
agreements, the Company collects interest at fixed rates (average rate of 7.6%
at December 30, 1994) and pays interest based on specified floating interest
rates of one to six month LIBOR (average rate of 6.7% at December 30, 1994).
One $100 million swap agreement expires in May 1995, and the remaining
agreements expire in 1997. Additionally, outstanding borrowings under the Line
of Credit with Marriott International, the Revolver, and a portion ($163
million at December 30, 1994) of the New York Marriott Marquis mortgage bear
interest based on variable rates. Accordingly, the amount of the Company's
interest expense under the interest rate swap agreements and the floating rate
debt for a particular year will be affected by changes in short-term interest
rates.
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SELECTED HISTORICAL FINANCIAL DATA
The following table presents certain selected historical financial data of
the Company which has been derived from the Host Marriott Corporation
Consolidated Financial Statements for the five most recent fiscal years ended
December 30, 1994. Except for the financial data as of and for the year ended
December 30, 1994 and the balance sheet data as of December 31, 1993, the
financial data in the table does not reflect the Distribution and related
transactions and, accordingly, the table presents data for the Company that
include amounts attributable to Marriott International. As a result of the
Distribution and related transactions, the assets, liabilities and businesses
of the Company have changed substantially. The information set forth below
should be read in conjunction with the Host Marriott Corporation Consolidated
Financial Statements and Notes thereto and the Management's Discussion and
Analysis of Financial Condition and Results of Operations each included in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------
1994 1993(1)(2)(3) 1992(3) 1991 1990(8)
------ --------------- ------------ ------------ -------
(53 WEEKS)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $1,501 $1,753 $8,722 $8,331 $7,646
Operating profit before
corporate expenses and
interest............... 191 134 483 464 353
Interest expense........ 206 201 235 251 183
Income (loss) before
extraordinary item and
cumulative effect of
accounting changes (4). (19) 57 85 82 47
Net income (loss)....... (25) 50 85 82 47
Earnings (loss) per
common share: (5)
Income (loss) before
extraordinary item
and cumulative effect
of accounting changes
(4)(7)............... $ (.13) $ .40 $ .64 $ .80 $ .46
Net income (loss)..... (.17) .35 .64 .80 .46
Cash dividends declared
per common share....... -- .14 .28 .28 .28
BALANCE SHEET DATA:
Total assets............ $3,822 $3,848 $6,346 $6,509 $7,034
Debt (6)................ 2,259 2,499 2,981 3,241 3,608
</TABLE>
- --------
(1) Certain revenues and costs and expenses for 1993 have been reclassified to
conform to the Company's new income statement presentation.
(2) Operating results for 1993 include the operations of Marriott International
only through the Distribution date of October 8, 1993. These operations had
a net pre-tax effect on income of $211 million for the year ended December
31, 1993 and are recorded as "Profit from operations distributed to
Marriott International" on the Company's consolidated statements of
operations and are, therefore, not included in sales, operating profit
before corporate expenses and interest, interest expense and interest
income for the same period. The net pre-tax effect of these operations is,
however, included in income before income taxes, extraordinary item and
cumulative effect of changes in accounting principles and in net income for
the same periods.
(3) Operating results in 1993 and 1992 included pre-tax costs related to the
Distribution totaling $13 million and $21 million, respectively, and a $7
million pre-tax restructuring charge for the Operating Group in 1993.
(4) Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," was adopted in the first fiscal quarter of 1993. In the second
quarter of 1993, the Company changed its accounting method for assets held
for sale. Also, the Company recognized a $5 million extraordinary loss
(net-of-tax) on the completion of the Exchange Offer.
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<PAGE>
(5) Earnings per common share is computed on a fully diluted basis by dividing
net income available for common stock by the weighted average number of
outstanding common and common equivalent shares, plus other potentially
dilutive securities. Common equivalent shares and other potentially
dilutive securities have been excluded from the weighted average number of
outstanding common shares for 1994, as they are antidilutive.
(6) Includes convertible subordinated debt of $20 million at December 31, 1993,
$228 million at January 1, 1993 and $210 million at January 3, 1992.
(7) Operating results in 1994 include a $6 million extraordinary loss (net-of-
tax) on the required redemption of New Notes.
(8) Operating results in 1990 included pre-tax restructuring charges and
writeoffs, net of certain non-recurring gains, of $153 million related to
continuing operations.
29
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Host Marriott Corporation (the "Company") is one of the largest owners of
lodging properties in the world. The Company is also the leading operator of
airport and tollroad food, beverage, and merchandise concessions, with
facilities in nearly every major U.S. commercial airport and on 14 tollroads.
The Company's 119 owned lodging properties as of December 30, 1994 are
generally operated under Marriott brand names and managed by Marriott
International, Inc. ("Marriott International"), formerly a wholly-owned
subsidiary of the Company. The Company also holds minority interests in various
partnerships that own, in the aggregate, over 260 additional properties
operated by Marriott International. The Company's properties span several
market segments, including full-service (primarily Marriott Hotels, Resorts and
Suites), moderate-priced (Courtyard by Marriott), extended-stay (Residence Inn
by Marriott) and economy (Fairfield Inn by Marriott). The Company's primary
emphasis, however, is on the growth of its full-service lodging portfolio.
In 1994, the Company sold 26 of its 30 Fairfield Inns. The Company also sold
its 14 senior living communities in 1994, which were leased to Marriott
International under long-term leases.
The Real Estate Group, the majority of which was formerly classified in the
"Lodging" segment, is comprised of the Company's existing business of ownership
of lodging properties, its partnership investments and undeveloped land
parcels, which together are sometimes referred to as the Company's "Ownership
and Development Business." The Operating Group, formerly included in the
"Contract Services" segment, consists of the food, beverage and merchandise
operations at airports, on tollroads and at tourist attractions, stadiums and
arenas, as well as restaurant operations, which together are sometimes referred
to as the Company's "Host/Travel Plazas Business." The new segments reflect the
Company's current business segments and operating environment.
The Company, through its Operating Group, is also the leading operator of
airport and tollroad food and merchandise concessions, with facilities in most
major commercial airports in the U.S. The Company operates restaurants, gift
shops and related facilities at over 70 airports, on 14 tollroads (including
over 95 travel plazas) and at more than 35 tourist attractions, stadiums and
arenas. Many of the Company's concessions operate under branded names,
including Pizza Hut, Burger King, Taco Bell, Sbarro's, Dunkin' Donuts,
Starbucks, TCBY (The Country's Best Yogurt), Mrs. Fields, and Cheers.
REAL ESTATE GROUP
At the beginning of 1994, the Real Estate Group consisted of the Company's
lodging properties (four hotel concepts plus the senior living communities),
real estate partnership investments, and undeveloped and leased land
operations. As of year-end 1994, the Real Estate Group consisted of 119 hotels,
31 partnership investments, the leased land operations, and 50 parcels of
undeveloped land comprising approximately 470 acres.
LODGING
The Company's principal focus in lodging is on the acquisition and ownership
of full-service hotels, resorts, and suites. Accordingly, all of the Company's
acquisitions made during 1994 were in this category. Other hotel lodging
properties represent quality assets in the limited-service (moderate-priced,
extended-stay, and economy) lodging segment. During 1994, the Company disposed
of its senior living communities and most of its Fairfield Inn properties.
Subsequent to year-end, the Company entered into a sale/leaseback
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<PAGE>
agreement with a real estate investment trust for 21 Courtyard properties
(3,004 rooms). Further sales of limited-service lodging properties are likely
over time.
The Real Estate Group's hotel properties are generally operated by Marriott
International under four Marriott brand lodging concepts which offer distinct
choices to meet consumers' specialized needs whenever they travel. These brands
have achieved favorable results compared to competitive hotels.
One commonly used indicator of market performance for hotels is revenue per
available room, or REVPAR, which measures daily room revenues generated on a
per room basis. This does not include food and beverage or other ancillary
revenues generated by the property. REVPAR represents the combination of the
average daily room rate charged and the average daily occupancy achieved. Each
of the Company's four lodging concepts reported annual increases in REVPAR from
1992 to 1994.
The following table sets forth information as of February 28, 1995 regarding
the hotel properties that comprise the Company's lodging segment.
<TABLE>
<CAPTION>
NUMBER NUMBER
OF FACILITIES OF ROOMS
------------- --------
<S> <C> <C>
Hotels, Resorts and Suites (full-service)............. 46(1) 21,763
Courtyard Hotels (moderate-priced).................... 54(2) 7,940
Residence Inns (extended-stay)........................ 19(3) 2,478
Fairfield Inns (economy).............................. 4 453
--- ------
Total............................................... 123 32,634
=== ======
</TABLE>
- --------
(1) Includes the Philadelphia Convention Center Marriott which opened in
January 1995, the Philadelphia Airport Marriott which is currently under
construction and scheduled for completion in December 1995, and the
Charlotte Executive Park Marriott which was acquired in January 1995.
(2) Includes the 21 Courtyard Hotels (3,004 rooms) sold and leased back in
March 1995.
(3) Includes a Residence Inn currently under construction and scheduled for
completion in early 1996.
As part of the Company's annual capital expenditure program, its properties
are improved or upgraded on a regular basis. The Company expends approximately
$50 million to $60 million annually on the renovation and refurbishment of the
Company's existing lodging properties. The expenditures provide for full
utilization of the properties through their estimated useful lives of generally
40 years.
Hotels, Resorts and Suites. As of December 30, 1994, full-service hotels
included 41 Marriott-branded hotels, resorts, and suites, and two other hotel
brands offering similar amenities. All but one of the Marriott-branded hotels
are managed by Marriott International under long-term agreements; the other is
operated by Marriott International's largest full-service franchisee. These
hotels generally contain from 300 to 600 rooms. The Company's convention hotels
are larger and contain up to 1,900 rooms. Hotel facilities typically include
convention and banquet facilities, a variety of restaurants and lounges,
swimming pools, gift shops, and parking facilities. The Company's full-service
hotels primarily serve business and pleasure travelers and group meetings at
locations in downtown and suburban areas, near airports and at resort locations
throughout the United States. The full-service hotels showed growth in both
rate and occupancy in 1994 to achieve the strong REVPAR growth for comparable
hotels. On a non-comparable basis, REVPAR grew 19% due to the inclusion of the
New York Marriott Marquis, which has both very high room rates and occupancy
levels, and hotels added in 1994, which generally had higher room rates than
the portfolio of hotels owned prior to 1994. Total hotel sales growth in 1994
was below the growth of room sales, as food, beverage and other less profitable
operations grew at a slower pace. Overall, this resulted in strong house profit
margins and excellent growth in reported revenues for 1994, which expanded at a
14% rate for comparable hotels. The average age
31
<PAGE>
of the full-service properties is 13 years. The chart below sets forth
performance information for such hotels for fiscal years 1992 through 1994.
<TABLE>
<CAPTION>
COMPARABLE
1994 1994 1993 (B) 1992 (A,B)
------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Number of properties.............. 43 24 24 23
Number of rooms................... 17,554 (c) 10,560 10,560 10,276
Average daily rate................ $102.84 (c) $93.89 $89.61 $88.81
Occupancy percentage.............. 77.4%(c) 76.2% 74.9% 72.3%
REVPAR............................ $ 79.59 (c) $71.52 $67.12 $64.21
REVPAR % change................... 19.0%(c) 6.6% 4.5% 8.4%
</TABLE>
- --------
(a) Excludes seven properties which were sold during 1992.
(b) Excludes the New York Marriott Marquis, which was not treated as an owned
hotel until December 31, 1993.
(c) Excludes the seven properties acquired in the last two weeks of fiscal year
1994.
The success of this segment in 1994 came from improvements at all but one
property, reflecting the growing strength of the full-service lodging market.
This improvement was achieved through steady increases in customer demand, as
well as sophisticated yield management techniques applied by the manager to
maximize REVPAR on a property-by-property basis.
A number of the Company's 1994 full-service hotel acquisitions were converted
to the Marriott brand upon acquisition, and the performance of these properties
is on target. The acquired properties are already showing improvements as the
benefits of Marriott International's marketing and reservation programs and
customer service initiatives take hold. The Company actively manages these
transitions and, in many cases, has worked closely with the operator to
selectively invest in enhancements to the physical product to be more
attractive to guests or more efficient to operate.
The Company's focus is on maximizing profitability throughout the portfolio
by concentrating on some key objectives. Some examples include evaluating
marginal restaurant operations, exiting low rate airline room contracts in
strengthening markets, reducing property-level overhead by sharing management
positions with other managed hotels in the vicinity, and selectively making
additional investments where favorable incremental returns are expected. These
objectives, while principally manager-initiated, have the Company's strong
support and the Company seeks to ensure their prompt implementation wherever
practical. Examples of these initiatives include the construction of an
additional ballroom at the Nashua Marriott Hotel and the conversion of certain
full-service rooms at the Miami Airport Marriott Hotel to limited-service
concepts.
Prospects for 1995 are promising with the full-year impact of 1994's
acquisitions and the opening of the Philadelphia Marriott Hotel adding to the
Company's strong base. Continued strength in demand, combined with improved
skills by the manager in capitalizing on opportunities, should result in
superior REVPAR growth. Further acquisitions are also anticipated.
The Company will continue to focus on cost control to ensure that hotel sales
increases serve to maximize house and operating profit. While certain levels of
fixed costs serve to increase profit margins as hotel sales increase,
successful performance is also resulting in more properties reaching levels
that allow the manager to share in the growth of profits in the form of higher
management fees. The Company views this as a positive development as it helps
to strengthen the alignment of the managers' interests with the Company's.
The Company recently completed construction of the Philadelphia Marriott
Hotel (1,200 rooms; opened in January 1995), which is the largest hotel in
Pennsylvania, and is constructing the Philadelphia Airport Hotel (419 rooms,
completion scheduled for December 1995), which, when completed, will be
operated by Marriott International. The Philadelphia Airport Hotel has been
largely financed through the issuance of $40 million of industrial revenue
bonds. The Philadelphia Marriott Hotel has been financed, in part, by a
mortgage loan provided by Marriott International.
32
<PAGE>
During 1994, the Company acquired 15 full-service hotels totalling
approximately 6,000 rooms in several transactions for approximately $443
million. The Company also provided 100% financing totalling approximately $35
million to an affiliated partnership, in which the Company owns the sole
general partner interest, for the acquisition of two full-service hotels (684
rooms). Additionally, the Company acquired a controlling interest in one 662-
room, full-service hotel through an equity investment of $16 million and debt
financing of $36 million (the debt was subsequently sold in 1995). The Company
is continually engaged in discussions with respect to other acquisition
opportunities and, subsequent to year-end, acquired the 300-room Charlotte
Executive Park Marriott Hotel for $15 million. The Company considers all 19 of
these properties as owned hotels for accounting purposes.
Courtyard Hotels. The Company's moderate-priced Courtyard hotels are
positioned to compete in their respective markets directly with major national
franchised moderate-priced hotel chains. Aimed at individual business and
pleasure travelers, as well as families, Courtyard hotels typically have about
150 rooms at locations in suburban areas and near airports throughout the
United States. Well-landscaped grounds include a courtyard with a pool and
socializing areas. Each hotel features meeting rooms and a restaurant and
lounge with approximately 80 seats. The operating systems developed for these
hotels allow Courtyard to be price competitive while providing value through
superior product and guest service. The 54 Courtyard hotels owned by the
Company during 1994 are among the newest in the Courtyard hotel system,
averaging only five years old. The Company's Courtyard properties have
substantially matured and are operating at exceptionally high occupancy rates.
The Company believes this competitive position will enable the manager to
continue to improve profitability by adjusting the mix of business to build
room rates. The chart below sets forth comparable performance information for
fiscal years 1992 through 1994.
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Number of properties................................. 54 54 54
Number of rooms...................................... 7,940 7,940 7,896
Average daily rate................................... $68.86 $64.58 $61.54
Occupancy percentage................................. 80.4% 79.7% 76.3%
REVPAR............................................... $55.37 $51.47 $46.96
REVPAR % change...................................... 7.6% 9.6% 20.6%
</TABLE>
The Company's Courtyard hotels benefited in 1994 from higher demand, driving
room rates 6.6% higher than last year, about twice the rate of inflation.
Coupled with a small occupancy increase, room revenues advanced almost 8%.
Overall sales growth was somewhat lower, as the growth in food and beverage
operations was moderate due to repositioning of restaurant operations where
profitability is low. House profit margins also increased by two percentage
points, reflecting the operating leverage inherent in properties already
running at near capacity.
During the first quarter of 1995, the Company sold and leased back 21 of its
Courtyard properties to a real estate investment trust (REIT) for $179 million
(10% of which is deferred). During the second quarter of 1995, the Company
entered into an agreement to sell and lease back an additional 17 Courtyards
with the REIT for $163 million (10% of which is deferred). The REIT also has an
option to buy and lease back up to 16 of the remaining Courtyard properties
within fifteen months. The leases provide the Company with the ability to
realize a substantial portion of the future cash flows from these properties.
From 50% to 75% of the proceeds from the sale will be used to pay down
publicly-held debt, as required.
Residence Inns. Residence Inn is the market leader in the extended-stay
lodging segment, enjoying solid customer preference, high guest satisfaction
and strong intent-to-return. The extended-stay lodging segment caters primarily
to business and family travelers who stay more than five consecutive nights.
Residence Inns typically have 80 to 130 studio and two-story penthouse suites
which are generally located in suburban settings throughout the United States.
Each Inn features a series of residential style buildings with landscaped
walkways, courtyards and recreational areas. The Inns do not have restaurants,
but offer complimentary continental breakfast, and most provide a complimentary
evening hospitality hour. Each suite contains a fully equipped kitchen, and
many suites have woodburning fireplaces.
33
<PAGE>
The 18 Residence Inns owned by the Company are among the newest in the
Residence Inn system, averaging only four years old. The table below sets forth
performance information for such Inns for fiscal years 1992 through 1994. The
following table excludes information with respect to the 11 Residence Inns that
are no longer consolidated with the Company as of December 31, 1993.
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Number of properties................................. 18 18 18
Number of rooms...................................... 2,178 2,178 2,178
Average daily rate................................... $79.58 $74.70 $73.38
Occupancy percentage................................. 85.6% 84.5% 77.4%
REVPAR............................................... $68.12 $63.12 $56.80
REVPAR % change...................................... 7.9% 11.1% 12.2%
</TABLE>
In 1994, the Residence Inn hotels performed well with advances in room rates
of almost twice the inflation rate, while also increasing occupancy by over one
percentage point. Continued popularity of this product with customers combined
with increasing business travel resulted in superior performance for 1994. At
an average occupancy rate of 85.6% for 1994, these properties were near full
occupancy during the business week and enjoyed high occupancies during the
weekends. Given this strong demand, the Company's Residence Inns were able to
improve room rates through managing their mix of business.
During 1993, the Company sold the majority of its equity interest in a
partnership owning 11 Residence Inns. The Company is currently constructing one
additional Residence Inn property in Pentagon City, Virginia, just outside of
Washington, D.C., which is scheduled for completion in early 1996.
Fairfield Inns. The Company's Fairfield Inns are positioned to compete in
their respective markets directly with major national economy motel chain
operators. Aimed at budget conscious individual business and pleasure
travelers, the Company's Fairfield Inns have 105 to 117 rooms. Fairfield Inns
have limited public space and do not include restaurants, however, they do
offer a complimentary breakfast program. The four Fairfield Inns owned by the
Company average only four years old. The chart below sets forth performance
information for the Company's Inns for fiscal years 1992 through 1994.
<TABLE>
<CAPTION>
1994(A) 1993 1992
------- ------ ------
<S> <C> <C> <C>
Number of properties................................. 4 30 30
Number of rooms...................................... 453 3,632 3,632
Average daily rate................................... $35.85 $39.82 $38.41
Occupancy percentage................................. 73.4% 79.3% 78.7%
REVPAR............................................... $26.31 $31.58 $30.23
REVPAR % change...................................... N/A 4.5% 16.4%
</TABLE>
- --------
(a) Excludes 26 properties which were sold during 1994.
In the third quarter of 1994, the Company completed the sale of 26 of its
Fairfield Inns to an unrelated party. The net proceeds from the sale were
approximately $114 million, which exceeded the carrying value of the hotels by
approximately $12 million. Approximately $27 million of the proceeds were
payable in the form of a note from the purchaser. Subsequent to year-end, the
Company signed an agreement to sell its four remaining Fairfield Inns.
Senior Living Communities. Until mid-1994, the Company owned 14 senior living
communities (one of which opened in February 1994). These communities were
located in seven states and offer independent living apartments, assisted
living services and skilled nursing care. Certain of these senior living
communities are operated under the trade names Brighton Gardens and Stratford
Court. Commencing with the Distribution, these communities have been leased to
and operated by Marriott International.
During the second and third quarters of 1994, the Company sold its 14 senior
living communities to an unrelated party for $320 million, which approximated
the communities' carrying value.
34
<PAGE>
INVESTMENTS IN AFFILIATED PARTNERSHIPS
The Company and certain of its subsidiaries also manage the Company's
partnership investments and conduct the partnership services business (the
"Partnership Business"). As such, the Company and/or its subsidiaries own an
equity investment in, and serve as the general partner or managing general
partner for, 31 partnerships which collectively own 45 Marriott full-service
hotels, 120 Courtyard hotels, 50 Residence Inns and 50 Fairfield Inns. In
addition, the Company holds notes receivable (net of reserves) from
partnerships totalling $174 million.
As the managing general partner, the Company or its subsidiaries are
responsible for the day-to-day management of partnership operations, which
includes payment of partnership obligations from partnership funds, preparation
of financial reports and tax returns and communications with lenders, limited
partners and regulatory bodies. The Company or its subsidiary is usually
reimbursed for the cost of providing these services.
Hotel properties owned by the partnerships generally were acquired from the
Company or its subsidiaries in connection with limited partnership offerings.
These hotel properties are currently operated under management agreements with
Marriott International. As the managing general partner of such partnerships,
the Company and its subsidiaries oversee and monitor Marriott International's
performance pursuant to these agreements.
The Company's interests in these partnerships range from 1% to 50%. Cash
distributions provided from these partnerships are tied to the overall
performance of the underlying properties and the overall level of debt owed by
the partnership. Partnership distributions to the Company approximated $4
million in 1994 and $6 million in 1993. All partnership debt is non-recourse to
the Company and its subsidiaries, except to the extent of limited debt service
guarantees discussed below.
The Company is contingently liable under various guarantees of debt
obligations of certain of these partnerships. Such commitments are limited in
the aggregate to $236 million at December 30, 1994. In most cases, fundings of
such guarantees represent loans to the respective partnerships.
OTHER REAL ESTATE GROUP INVESTMENTS
The Company owns 49 undeveloped parcels of vacant land, totalling
approximately 250 acres, originally purchased for the development of hotels or
senior living communities. The Company sold 15 parcels during 1994 for proceeds
of $23 million. In addition, the Company owns a 210-acre parcel of undeveloped
land in Germantown, Maryland, suitable for commercial use. The Company may sell
these properties from time-to-time when market conditions are favorable. Some
of the properties may be developed as part of a long-term strategy to realize
the maximum value of these parcels. The Company also has lease and sublease
activity relating primarily to its former restaurant operations.
OPERATING GROUP
The Operating Group operates food, beverage and merchandise concessions at
airports, travel plazas and other locations. The Company, through the Operating
Group, is the leading operator of airport concessions in the United States with
restaurants, gift shops and related facilities at nearly 70 domestic airports
and four foreign airports. The Company's foreign airport operations include
concessions at two airports in New Zealand, one airport in Australia, and one
airport in Canada. The Company's airport concessions operate primarily under
the trade name "Host" and "Host Marriott" and include restaurants, cafeterias,
snack bars and gift shops. Payments by the Company under operating contracts
with airport authorities are typically based on percentages of sales subject to
an annual minimum. The terms of such agreements vary, but generally have
initial terms of ten or more years for food and beverage concessions, and five
or more years for merchandise facilities. Additionally, the Company operates
restaurants, gift shops and related facilities at more than 35 major tourist
attractions, stadiums and arenas.
35
<PAGE>
During the fourth quarter of 1992, a wholly-owned subsidiary of the Company
acquired the airport concessions business of Dobbs Houses, Inc. for
approximately $47 million, adding 32 contracts at 19 airports and two hotel
gift shops to the concessions business. In addition, during 1993, the Company
acquired the National Airport concession contract in Washington, D.C. for $9
million.
The Company is also the leading operator of travel plazas in the United
States, with over 95 travel plazas on 14 tollroads. The Company currently
operates such facilities under contracts with the highway authorities which
typically extend 15 years. The highway systems are located primarily in the
Mid-Atlantic, Midwest and New England states as well as in Florida. Travel
plazas typically include restaurants, snack bars, vending areas and merchandise
facilities.
The Operating Group employs 27 different food, beverage and merchandise
concepts at its airports and tollroads, including Pizza Hut, Burger King, Taco
Bell, Sbarro's, Dunkin Donuts, Starbucks, TCBY (The Country's Best Yogurt),
Mrs. Fields and Cheers. As a licensee of these brands, the Company typically
pays royalties based on a percentage of sales.
In November 1993, the Operating Group announced a plan to redesign its
operations structure to improve the effectiveness and competitiveness of the
business. In the fourth quarter of 1993, the Company recorded a restructuring
charge of approximately $7 million, principally for severance, relocation, and
the write-off of development costs for a data processing system no longer
required under the new organizational structure. Implementation of the new
structure was completed in early 1994.
COMPETITION
The cyclical nature of the U.S. lodging industry has been demonstrated over
the past two decades. Low hotel profitability during the 1974-75 recession led
to a prolonged slump in new construction and, over time, high occupancy rates
and real price increases in the late 1970s and early 1980s. Changes in tax and
banking laws during the early 1980s precipitated a construction boom that
peaked in 1986 but created an oversupply of hotel rooms that has not yet been
fully absorbed by increased demand. The Company expects the U.S. hotel
supply/demand imbalance to continue to improve gradually over the next few
years as room demand continues to grow and room supply growth is expected to be
minimal, especially in the full-service segment.
The Company believes that its lodging properties will continue to enjoy
competitive advantages arising from their participation in the Marriott
International hotel system. Repeat guest business in the Marriott hotel system
is enhanced by the Marriott Honored Guest Awards program, which awards frequent
travelers with free stays at Marriott Hotels, Resorts and Suites, and by
frequent stay programs established by Courtyard (Courtyard Club). Marriott
International's nationwide marketing programs and reservation systems as well
as the advantage of increasing customer preference for Marriott brands should
also help these properties to maintain or increase their premium over
competitors in both occupancy and room rates.
Through its Operating Group, the Company competes with certain national and
regional companies to obtain the rights from airport and highway authorities to
operate food, beverage and merchandise concessions. To compete effectively, the
Company regularly updates and refines its product offerings (including the
addition of branded products) and facilities. Through these efforts, the
Company is able to generate higher sales and thereby increase returns both to
the airport and highway authorities and the Company. Generating these financial
results, as well as achieving high satisfaction with the products and services
provided, better positions the Operating Group to be a preferred choice when
renewing contracts or obtaining new contracts.
The Operating Group's contracts generally do not contain extension or renewal
provisions, although they are frequently extended on month-to-month leases at
contract completion while a rebidding procedure is completed. In any given
year, a number of the Operating Group's contracts expire and are rebid. The
Operating Group has historically been highly successful in obtaining renewals
and extensions of its existing
36
<PAGE>
base of contracts. Of the three major contracts that expired in 1994, all
continue to operate on an interim month-to-month basis, with two of the
contracts expected to be awarded in 1995 and the third anticipated to be
awarded in 1996. These three contracts represent approximately 12% of the total
annual concessions' revenue. No other major Operating Group airport contracts
expire in 1995. Management has detailed plans in place to maintain a portion of
this business on a basis that meets its return requirements. The plans include,
in many cases, the inclusion of local or minority-owned businesses as part of
the proposal team, which is being mandated by landlords as a requirement for
doing business. These arrangements often have the negative financial effect of
spreading the Company's fixed costs over a diminished revenue base. The
Operating Group is utilizing unique strategies, such as a hybrid
operator/developer structure, to minimize the financial impact of these
arrangements.
EMPLOYEES
At December 30, 1994, the Company and its subsidiaries collectively had
approximately 22,000 employees. Approximately 5,600 of the employees of the
Company and its subsidiaries are covered by collective bargaining agreements.
37
<PAGE>
LEGAL PROCEEDINGS
A number of holders of the Company's Old Notes instituted legal proceedings
against the Company. For a discussion of the allegations raised and agreements
to settle certain of such claims, see "Risk Factors--Pending Litigation."
THE DISTRIBUTION
Prior to October 8, 1993, the Company was named "Marriott Corporation." In
addition to conducting its existing Ownership Business and the Host/Travel
Plazas Business, Marriott Corporation engaged in lodging and senior living
services management, timeshare resort development and operation, food service
and facilities management and other contract services businesses (the
"Management Business"). On October 8, 1993, Marriott Corporation made a special
dividend consisting of the distribution (the "Distribution") to holders of
outstanding shares of Common Stock, on a share-for-share basis, of all
outstanding shares of its wholly-owned subsidiary, Marriott International,
which at the time of the Distribution held all of the assets relating to the
Management Business. Marriott International now conducts the Management
Business as a separate publicly-traded company. The Company and Marriott
International are parties to several important ongoing arrangements, including
(i) agreements pursuant to which Marriott International manages or leases the
Company's portfolio of lodging properties and senior living facilities and (ii)
the Credit Agreement pursuant to which Marriott International provides a $630
million line of credit to Holdings. See "Relationship Between the Company and
Marriott International" and "Financing--Credit Agreement."
THE EXCHANGE OFFER AND RESTRUCTURING
THE EXCHANGE OFFER
In connection with the Distribution, the Company also completed the Exchange
Offer pursuant to which holders of Old Notes in aggregate principal amount of
approximately $1.2 billion exchanged such Old Notes for a combination of (i)
cash, (ii) Common Stock and (iii) New Notes issued by Hospitality. The coupon
and maturity date for each series of New Notes was 100 basis points higher and
four years later, respectively, than the series of Old Notes for which it was
exchanged (except that the maturity of the New Notes issued in exchange for the
Series L Senior Notes due 2012 was shortened by five years). The Company also
conducted a consent solicitation pursuant to which, as a condition to
participation in the Exchange Offer, holders of Old Notes were required to
deliver (i) a consent to the Distribution and a waiver of any defaults, claims
or rights under the Old Note Indenture relating thereto, (ii) a release and
discharge of legal or equitable claims relating to the Distribution and (iii) a
consent to the deletion of a negative pledge covenant in the Old Note Indenture
to permit the Restructuring and grant of a stock pledge under the New Note
Indenture (collectively, the "Consents and Releases").
The Company received tenders of approximately $1.2 billion of Old Notes.
Excluding the Series F Notes due 1995 (the "Old Series F Notes") and the Series
I Notes due 1995 (the "Old Series I Notes"), the Company received tenders for
82% of the aggregate amount of Old Notes subject to the Exchange Offer. The
Company has redeemed all of the Old Series F Notes that did not tender in the
Exchange Offer, and has secured the Old Series I Notes equally and ratably with
the New Notes issued in the Exchange Offer. The Company recognized an
extraordinary after-tax loss of approximately $5 million in the fourth quarter
of fiscal 1993 in connection with extinguishment of debt in the Exchange Offer.
THE RESTRUCTURING
In connection with the Exchange Offer, the Company effected the restructuring
of its assets (the "Restructuring"). As a result of the Restructuring, the
Company's most significant asset is the capital stock of Holdings, although the
Company conducts certain operations directly and holds interests in various
other
38
<PAGE>
subsidiaries. Holdings is a holding company, the primary asset of which is the
capital stock of Hospitality, and is the borrower under the Credit Agreement.
Hospitality is also a holding company which owns the capital stock of HMH
Properties, Inc. ("HMH Properties") and Host Marriott Travel Plazas, Inc.
("HMTP"). In the Restructuring, most of the assets relating to the Ownership
Business were transferred to HMH Properties and its subsidiaries, and most of
the assets relating to the Host/Travel Plazas Business were transferred to HMTP
and its subsidiaries. Certain assets relating to such businesses (the "Retained
Business") were retained directly by the Company and certain of its other
subsidiaries (the "Retained Business Subsidiaries").
The Company also has two subsidiaries used to fund new acquisitions. HMC
Ventures, Inc. ("HMC Ventures") is an unrestricted subsidiary under the Credit
Agreement that has been capitalized with approximately $50 million from asset
sales. HMC Acquisitions is a newly-formed subsidiary that, pursuant to
amendments to the Credit Agreement, is permitted to use the net proceeds of the
January 1994 sale of Common Stock (approximately $230 million), along with
proceeds from a $230 million revolving line of credit obtained during 1994, to
fund acquisitions. HMC Acquisitions is a guarantor under the Credit Agreement.
See "Financing--Credit Agreement."
FINANCING
The following is a summary of important terms of certain indebtedness and
financing arrangements of the Company and its subsidiaries. For more complete
information regarding such documents, reference is made to the definitive
agreements and instruments governing such indebtedness and financing
arrangements, copies of which have been filed as exhibits to, or incorporated
by reference in, the Registration Statement of which this Prospectus is a part,
and which are incorporated by reference herein.
NEW NOTES
Hospitality issued $1.2 billion in aggregate principal amount of New Notes in
the Exchange Offer. Each series of New Notes is secured by a pledge of all of
the capital stock of Hospitality, HMH Properties, HMTP and certain of their
subsidiaries, and is guaranteed (the "Guarantees") by Holdings, HMH Properties,
HMTP and their material subsidiaries (the "Guarantors"). The New Notes were
issued in series with an average maturity of 11.3 years. The weighted average
interest rate on the New Notes is 10.4%. The New Notes are senior obligations
of Hospitality and the Guarantees are senior obligations of the Guarantors. The
New Note Indenture contains covenants that, among other things, (i) limit the
ability of Hospitality to pay dividends and make other distributions and
restricted payments, (ii) limit the ability of Hospitality and its subsidiaries
to incur additional debt, (iii) limit the ability of Hospitality and its
subsidiaries to create additional liens on their respective assets, (iv) limit
the ability of the subsidiaries of Hospitality to incur debt and issue
preferred stock, (v) limit the ability of Hospitality and its subsidiaries to
engage in certain transactions with related parties, (vi) limit the ability of
each subsidiary of Hospitality to enter into agreements restricting such
subsidiary in paying dividends or making certain other payments and (vii) limit
the activities and businesses of Holdings.
Under certain circumstances, Hospitality is required to redeem all or a
portion of the New Notes with the proceeds of Refinancing Indebtedness (as
defined in the New Note Indenture) incurred by Hospitality or its subsidiaries,
and with certain proceeds of the sale of equity interests of HMTP and/or its
subsidiaries, at a redemption price of (i) 100% of the aggregate principal
amount of such notes plus accrued and unpaid interest thereon, if the
Comparable Interest Rate (as defined in the New Note Indenture) of this
Refinancing Indebtedness (or, in the case of the sale of equity interests,
certain Refinancing Indebtedness incurred substantially contemporaneously
therewith) is not less than the interest rate of the notes redeemed or if the
notes redeemed mature within 18 months, or (ii) otherwise, 103% of the
aggregate principal amount of such notes plus accrued and unpaid interest
thereon. Hospitality is also required, under certain circumstances, to
39
<PAGE>
redeem and offer to repurchase New Notes upon the sale of certain assets of
Hospitality or its subsidiaries, with up to 75% of the net proceeds of such
asset sales, at a redemption/repurchase price of 100% of the aggregate
principal amount of such notes plus accrued and unpaid interest thereon. In
addition, each holder of the New Notes has the right to require Hospitality to
repurchase the New Notes of such holder, at 101% of their aggregate principal
amount plus accrued and unpaid interest thereon, upon the occurrence of certain
events constituting a Change of Control as defined under the New Note
Indenture.
Based on 1994 Cumulative Available Net Proceeds from Qualifying Asset Sales
(as defined in the New Notes Indenture), Hospitality redeemed approximately
$292 million of New Notes in 1994. Hospitality will make further redemptions
and offers to repurchase as and when necessary based on cumulative net proceeds
from qualifying asset sales. Hospitality may also from time to time make open
market purchases of its debt securities, including the New Notes, to the extent
such purchases are viewed as an attractive use of available cash. During 1994,
Hospitality purchased approximately $15 million of New Notes with excess cash
from operations.
Management believes that the covenants and other provisions of the New Notes
Indenture will not materially restrict or inhibit the Company's ability to meet
its future financing needs.
OLD NOTES
The Company has $223 million in aggregate principal amount outstanding of Old
Notes. The Old Notes are senior obligations of the Company. The Old Notes were
issued in series and have an average maturity of approximately 4 years. The
weighted average interest rate on the Old Notes is 9.0%, exclusive of the
impact of interest rate swaps. The Old Note Indenture contains certain
covenants that, among other things, limit the ability of the Company to (i)
create liens on its assets and (ii) enter into certain sale and leaseback
transactions. Approximately $7.5 million of Old Notes were repurchased during
1994. See "Risk Factors--Pending Litigation".
CREDIT AGREEMENT
Marriott International and Holdings have entered into a Credit Agreement
pursuant to which Holdings has the right to borrow from Marriott International
up to $630 million to fund (i) obligations under certain guarantees made by the
Company, (ii) specified recourse debt of the Company and its subsidiaries
(including the New Notes at maturity), (iii) repayment of interest on amounts
borrowed under the Credit Agreement and on specified recourse debt of the
Company and its subsidiaries (including the New Notes), (iv) certain capital
expenditures under commitments to construct the Philadelphia Airport hotel (to
the extent not funded by an existing $40 million credit facility) and the
Philadelphia Marriott hotel (to the extent not funded under the Philadelphia
Mortgage (defined below)), and (v) other Marriott International approved
capital expenditures or other guarantees of the Company. The line of credit
established by the Credit Agreement will be available through August 2007 (or,
if earlier, the date when no New Notes are outstanding), with final maturity
one year thereafter. Holdings will pay Marriott International a commitment fee
equal to one percent per year on any unborrowed amounts. Additionally, any such
borrowings are guaranteed by, or secured by the pledge of the stock of, certain
subsidiaries of the Company, other than Hospitality or any of Hospitality's
subsidiaries.
Borrowings under the Credit Agreement bear interest at a floating rate equal
to the London Interbank Borrowing Rate ("LIBOR") (as defined in the Credit
Agreement) plus 400 basis points (provided that any interest in excess of 10.5
percent per annum will be deferred until maturity and will not reduce
availability under the Credit Agreement). Outstanding borrowings must be
reduced or repaid out of Net Cash Flow (as defined in the Credit Agreement) on
a quarterly basis. Amounts repaid may be reborrowed for the purposes specified
in the Credit Agreement during the commitment term, subject to availability
under the commitment (which is $630 million, subject to reduction to the extent
that the sum of outstanding borrowings plus the principal amount of New Notes
outstanding is less than $630 million).
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The Credit Agreement imposes certain restrictions on the ability of the
Company and the Retained Business Subsidiaries to incur additional debt, impose
liens or mortgages on their properties (other than various types of liens
arising in the ordinary course of business), extend new guarantees (other than
replacement guarantees), pay dividends, repurchase their common stock, make
investments and incur capital expenditures. New debt is generally restricted to
refinancing debt, non-recourse secured debt with a loan to value ratio of not
less than 50% and certain types of subordinated debt. Liens and mortgages
securing debt, other than existing liens and replacements of existing liens in
connection with a debt refinancing, are generally limited to liens securing the
new non-recourse secured debt described above. New guarantees of the Company's
and its subsidiaries' debt, with an aggregate guarantee liability of not more
than $150 million, are permitted, to the extent that each such guarantee
supports no more than 20% of the principal amount of new non-recourse secured
debt to which it relates and the principal amount of such debt is not greater
than 70% of the value of the property which secures it. Dividends and
distributions on stock (other than dividends on the Company's existing
preferred stock, which are permitted), repurchases of stock, capital
expenditures (other than expenditures to maintain existing assets and business
operations), investments in persons other than subsidiaries and certain other
restricted payments by the Company and the Retained Business Subsidiaries are
generally prohibited (subject to specified exceptions), so long as there are
any outstanding advances under the Credit Agreement. When no advances are
outstanding under the Credit Agreement and the Company and the Retained
Business Subsidiaries have adequately reserved for debt maturities over a
6-month term, (i) capital expenditures and additional investments to acquire
entities engaged in the Ownership Business and the Host/Travel Plazas Business
are generally permitted and (ii) such restricted payments as would otherwise be
prohibited are permitted in the amount by which aggregate EBITDA of the Company
and the Retained Business Subsidiaries (unconsolidated with Hospitality) and
the proceeds of specified stock issuances exceed 170% of the aggregate of
certain specified charges. Other covenants under the Credit Agreement restrict
the ability of the Company and the Retained Business Subsidiaries to enter into
new leases (other than in the ordinary course of business), sell assets (except
for fair market value and, subject to certain exceptions, for at least 75% cash
consideration), issue new preferred stock, prepay indebtedness (other than in
connection with refinancings and other specified exceptions), merge or
consolidate with other entities or change the nature of their business.
If an event of default (as defined in the Credit Agreement) occurs and is
continuing, Marriott International is entitled to certain specified remedies,
including the right to foreclose on its security interest in the stock of
certain of the Retained Business Subsidiaries and the right to require Net Cash
Flow (which includes proceeds of stock issuances) of the Company and the
Retained Business Subsidiaries to be turned over on a quarterly basis to
Marriott International, to be used to repay all advances under the Credit
Agreement with the remainder to be held by Marriott International in trust as
security for future such advances until all events of default cease to exist.
However, prior to August 2007 (or such earlier date as no New Notes are
outstanding) Marriott International will not be entitled to (i) accelerate the
maturity of amounts due under the Credit Agreement (other than upon the
occurrence of certain bankruptcy events, or the acceleration of the maturity of
the New Notes as a result of an event of default under the New Note Indenture)
or (ii) foreclose on its security interest in the stock of Holdings. Upon the
occurrence and during the continuation of any event of default under the Credit
Agreement, Marriott International has the right to set-off and apply amounts
owed by it to or for the credit or account of the Company or certain
subsidiaries identified in the Credit Agreement against any Obligation (as
defined in the Credit Agreement) of Holdings then due and payable under the
Credit Agreement. Marriott International's right of set-off does not apply,
however, to the extent (but only to the extent) that any agreement in effect on
the Distribution Date to which the Company or certain specified subsidiaries is
a party, or any financing agreement permitted by the Credit Agreement entered
into by the Company or a specified subsidiary prohibits such set-off with
respect to the Company or the specified subsidiaries or with respect to any
specified assets of the Company or such subsidiaries.
In connection with the Company's offering of Common Stock in January 1994,
Marriott International and the Company entered into an amendment to the Credit
Agreement, that (i) permits the Company to use
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any portion of the proceeds of such offering (approximately $230 million) to
capitalize HMC Acquisitions, a new subsidiary formed to make acquisitions, and
(ii) exempt such proceeds from the mandatory repayment provisions of the Credit
Agreement. HMC Acquisitions is permitted to incur indebtedness and to reinvest
its Net Cash Flow (including proceeds from asset sales) in its ongoing
businesses and/or new acquisitions, except that, when the outstanding balance
under the Credit Agreement exceeds $450 million, then HMC Acquisitions will be
required to use Net Cash Flow (plus any unused portion of the net proceeds from
such offering) to repay balances under the Credit Agreement and will be
restricted in developing or acquiring new assets. HMC Acquisitions was
capitalized with approximately $210 million of the proceeds from the Common
Stock offering.
The Company owns a portfolio of real estate which can be sold or used to
secure new financings. Property and equipment totaled $3.2 billion at December
30, 1994, $1.7 billion of which had not been pledged or mortgaged. The Company
may secure long-term financing and (subject, among other things, to compliance
with its existing debt agreements, including requirements to use the proceeds
of certain refinancings to repay indebtedness) may use unencumbered assets as
security for future financings, if such financings are determined to be
advantageous. At December 30, 1994, approximately $1.4 billion of the Company's
$3.2 billion portfolio of real estate was owned by Hospitality and its
subsidiaries. The capital stock of Hospitality and of most of its subsidiaries
has been pledged as security for the New Notes. Of this $1.4 billion portfolio
of property and equipment owned by Hospitality and its subsidiaries, only $80
million has been pledged or mortgaged. Under the New Notes Indenture, up to 75%
of the Net Proceeds from Qualifying Net Asset Sales or 100% from Refinancing
Indebtedness (each as defined in the New Notes Indenture) are to be used to
redeem or repurchase New Notes.
Management believes that the covenants and other provisions of the Credit
Agreement will not materially restrict or inhibit the Company's ability to meet
its future financing needs.
RELATIONSHIP BETWEEN THE COMPANY AND
MARRIOTT INTERNATIONAL
For the purpose of governing certain of the ongoing relationships between the
Company and Marriott International after the Distribution and to provide
mechanisms for an orderly transition, the Company and Marriott International
have entered into various agreements and have adopted policies, as described in
this section. The following are summaries of the principal terms of most such
agreements and do not purport to be complete. The following summaries are
qualified in their entirety by reference to the actual agreements which have
been previously filed by the Company with the Securities and Exchange
Commission.
DISTRIBUTION AGREEMENT
Prior to the Distribution, the Company and Marriott International entered
into the Distribution Agreement, which provided for, among other things, (i)
certain asset transfers to occur prior to the Distribution (the "Assets
Transfers"), (ii) the Distribution, (iii) the division between the Company and
Marriott International of certain liabilities and (iv) certain other agreements
governing the relationship between the Company and Marriott International
following the Distribution.
Subject to certain exceptions, the Distribution Agreement provides for, among
other things, assumptions of liabilities and cross-indemnities designed to
allocate, effective as of the Distribution, financial responsibility for the
liabilities arising out of or in connection with the Management Business to
Marriott International and its subsidiaries, and financial responsibility for
the liabilities arising out of or in connection with the Ownership Business and
Host/Travel Plazas Business, along with the Company's liabilities under a
substantial portion of its pre-existing financing and long-term debt
obligations, to the Company and its retained subsidiaries. The agreements
executed in connection with the Distribution Agreement also set forth certain
specific allocations of liabilities between the Company and Marriott
International.
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To avoid adversely affecting the intended tax consequences of the
Distribution and related transactions, the Distribution Agreement provides
that, until the second anniversary of the Distribution, Marriott International
must obtain an opinion of counsel reasonably satisfactory to the Company or a
supplemental tax ruling before Marriott International may make certain material
dispositions of its assets, engage in certain repurchases of Marriott
International capital stock or cease the active conduct of its business
independently, with its own employees and without material changes. The Company
must also obtain an opinion of counsel reasonably satisfactory to Marriott
International or a supplemental tax ruling before the Company may engage in
similar transactions during such period. The Company does not expect these
limitations to inhibit significantly its operations, growth opportunities or
its ability to respond to unanticipated developments.
Under the Distribution Agreement, Marriott International has a right (the
"Marriott International Purchase Right") to purchase up to 20% of each class of
the Company's voting stock (determined after assuming full exercise of the
right) at its then fair market value (based on an average of trading prices
during a specified period), upon the occurrence of certain specified events
generally involving a change in control of the Company. The Marriott
International Purchase Right terminates on October 8, 2003. The Marriott
International Purchase Right may have certain antitakeover effects as described
in "Antitakeover Effects of Certain Provisions of the Company's Certificate and
Bylaws and the Marriott International Purchase Right."
In addition, under the Distribution Agreement, Marriott International has a
right of first offer if the Company decides to sell all or any substantial
portion of the business of the Company's Operating Group. Pursuant to such
right, prior to selling all or a substantial portion of such business to any
third party, the Company must first offer to sell the Operating Group business
(or applicable portion thereof) to Marriott International. If Marriott
International declines to purchase the Operating Group business at a price
established by the Company, the Company will be free to sell such business for
a specified period of time to an unrelated third-party at a price at least
equal to 95% of the price offered to Marriott International and on terms and
conditions substantially consistent with those offered to Marriott
International. The right of first offer with respect to the Operating Group
business will terminate on October 8, 2003.
LODGING MANAGEMENT AGREEMENTS
Marriott International and certain of its subsidiaries entered into
management agreements with the Company and certain of its subsidiaries (the
"Lodging Management Agreements") to manage the Marriott Hotels, Resorts and
Suites, Courtyard hotels, Residence Inns and Fairfield Inns owned by the
Company and its subsidiaries as of October 8, 1993. There are four types of
Lodging Management Agreements corresponding to each line of Marriott lodging
facilities. The terms of each type of Lodging Management Agreement reflect
market terms and conditions and are substantially similar to the terms of
recently negotiated management agreements with third-party owners regarding
lodging facilities of the same type. A separate agreement was entered into with
respect to each individual lodging facility, or in certain cases a group of
lodging facilities, based on the appropriate form of Lodging Management
Agreement for lodging facilities of such type, with appropriate adjustments
made for properties subject to ground leases, existing mortgages or covenants,
conditions and other special factors relating to a particular lodging facility.
Each Lodging Management Agreement has an initial term of 20 years and, at the
option of Marriott International, may be renewed for up to three additional
terms of ten years each, aggregating 30 years, for a total term of up to 50
years. Each Lodging Management Agreement for the Courtyard hotels, Fairfield
Inns and Residence Inns (but not full-service hotels) is also subject to the
terms of a Consolidation Agreement (the "Consolidation Agreement") entered into
between Marriott International and the Company, pursuant to which (i) certain
fees payable under the Lodging Management Agreement with respect to a
particular lodging facility will be determined on a consolidated basis with
certain fees payable under the Lodging Management Agreements for all lodging
facilities of the same type, and (ii) certain base fees payable under Lodging
Management Agreements with respect to a particular lodging facility will be
waived in return for payment of an incentive fee upon the sale of such
facility. Marriott International does not have the right to set off amounts
owed to
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the Company under any Lodging Management Agreement against any other
indebtedness or amounts due from the Company although, under the Consolidation
Agreement (which is discussed below), all revenues collected, expenses incurred
and management fees earned by Marriott International under Lodging Management
Agreements for the Company's limited service hotels are aggregated on the basis
of hotel product line. In general, properties remain subject to the Lodging
Management Agreement upon the sale of such property to third parties. The
principal terms of the four types of Lodging Management Agreements, along with
the Consolidation Agreement, are summarized below.
Under each Lodging Management Agreement for full-service hotels, Marriott
International collects all revenue generated at a particular lodging property.
Marriott International holds such amounts on behalf of the Company in
segregated accounts and forwards to the Company every two weeks all amounts in
excess of certain expenses and management fees (as described more fully below).
Under the Lodging Management Agreements for the Company's limited service
hotels and the Consolidation Agreement (which is discussed below), all revenues
generated at the Company's limited service hotels are collected and aggregated
in a single segregated account for each limited service product line (i.e.,
Courtyard, Fairfield Inns and Residence Inns). Marriott International forwards
to the Company amounts in excess of aggregated expenses and management fees in
a manner similar to that for the full-service hotels. Because amounts collected
by Marriott International are held on the Company's behalf, the Company does
not depend upon the creditworthiness of Marriott International for receipt of
such payments.
Marriott Hotels, Resorts and Suites. The form of Lodging Management Agreement
for full-service hotels in the Marriott Hotels, Resorts and Suites line
provides for a base management fee equal to three percent of annual gross
revenues plus an incentive management fee equal to 50 percent of "Available
Cash Flow" for each fiscal year (provided that the cumulative incentive
management fee may not on any date exceed 20 percent of the cumulative
operating profit of the hotel from the Distribution through such date).
"Available Cash Flow" is defined to be the excess of "Operating Profit" over
the "Owner's Priority." "Operating Profit" is defined generally in all forms of
Lodging Management Agreements as gross revenues, less all ordinary and
necessary operating expenses, including all base and system fees and
reimbursement for certain system-wide operating costs ("Chain Services"), as
well as a deduction to fund a required reserve for furniture, fixtures and
equipment for certain hotels, before any depreciation or amortization or
similar fixed charges. "Owner's Priority" in all forms of Lodging Management
Agreements is derived from an agreed upon base amount assigned to each lodging
facility. Marriott International is also entitled to reimbursement for certain
costs attributable to Chain Services of Marriott International. The Company has
the option to terminate the agreement if specified performance thresholds
regarding Operating Profit are not satisfied and if specified revenue market
share tests are not met (provided that Marriott International can elect to
avoid such termination by making cure payments to the extent necessary to allow
the specified Operating Profit thresholds to be satisfied).
Since October 8, 1993, the Company has added 19 full-service hotels. Fifteen
of these properties are managed by Marriott International, Inc. using the
Marriott brand name under management agreements that were in place with the
previous owners, or that were negotiated by the Company in connection with the
acquisitions. The terms of the contracts vary, but are generally similar to the
terms outlined above for hotels owned at October 8, 1993, except for the
contracts negotiated by the Company in connection with the acquisitions where
the incentive management fee is equal to 40% of "Available Cash Flow" (provided
that the annual incentive management fee may not exceed 20% of the annual
operating profit of the hotel).
The Company intends to aggressively pursue further hotel acquisitions and it
is anticipated that the Company will engage Marriott International, Inc. to
manage many of the hotels that are acquired.
Limited Service Hotels. The forms of Lodging Management Agreements for
Courtyard hotels, Residence Inns and Fairfield Inns provide for a system fee
equal to three percent (in the case of Courtyard hotels and Fairfield Inns) or
four percent (in the case of Residence Inns) of annual gross revenue, and a
base fee equal to two percent of annual gross revenues. The base fee is
deferred in favor of the Owner's Priority,
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and in any fiscal year in which the base fee is greater than Operating Profit
(prior to deduction of the base fee) less Owner's Priority, the excess base
fee is deferred, to be paid in a subsequent fiscal year out of excess
Operating Profit. Owner's Priority and Operating Profit are determined in
substantially the same manner as described above for Marriott Hotels, Resorts
and Suites. In addition, the agreements provide for an incentive management
fee equal to 50 percent of "Available Cash Flow" for each fiscal year
(provided that the cumulative incentive management fee may not on any date
exceed 20 percent of the cumulative Operating Profit of the hotel through such
date). "Available Cash Flow" is defined to be the excess of Operating Profit
(after deduction of the base fee, including any portion of the base fee that
is deferred or waived) over the Owner's Priority. Under such forms of
agreement, Marriott International is also entitled to reimbursement for
certain costs attributable to Chain Services of Marriott International. The
Company or its subsidiaries have the option to terminate the agreement if
specified performance thresholds regarding Operating Profit are not satisfied
and if specified revenue market share tests are not met (provided that
Marriott International can elect to avoid such termination by making cure
payments to the extent necessary to allow the specified Operating Profit
thresholds to be satisfied).
Consolidation Agreement. Each Lodging Management Agreement for the Courtyard
hotels, Fairfield Inns and Residence Inns (but not full-service hotels) is
subject to the terms of the Consolidation Agreement. Pursuant to the
Consolidation Agreement, certain revenues, expenses and fees payable under the
Lodging Management Agreements for Courtyard hotels, Residence Inns and
Fairfield Inns are consolidated by product line as set forth below. With
respect to any Courtyard hotels, Residence Inns or Fairfield Inns managed by
Marriott International under a Lodging Management Agreement, for so long as
the Company has not sold or financed any such lodging facility, then the
calculations, distributions and dispositions of gross revenues, reserves, base
fees, Owner's Priority, incentive management fees and system fees under the
Lodging Management Agreement with respect to such lodging facility will be
determined and reported on an aggregate basis, together with all such
facilities governed by a Lodging Management Agreement in the same product
line. After any such lodging facility is sold or financed, the Consolidation
Agreement will no longer be applicable to such facility, and the gross
revenues, reserves, base fee, Owner's Priority, incentive management fee and
system fee for such facility will be determined solely in accordance with the
Lodging Management Agreement applicable to such facility.
In addition, pursuant to the terms of the Consolidation Agreement, the base
fee payable under the Lodging Management Agreements (other than Lodging
Management Agreements for full-service hotels) is modified as set forth below.
Until December 31, 2000, in lieu of the base fees payable to Marriott
International with respect to the Courtyard hotels, Residence Inns and
Fairfield Inns managed by Marriott International under a Lodging Management
Agreement, Marriott International will receive a "Bonus Incentive Fee" upon
the sale of any of such facilities by the Company. The "Bonus Incentive Fee"
is defined to be 50 percent of the "Net Excess Sale Proceeds" resulting from
the sale of such facility (provided that the Bonus Incentive Fee shall not
exceed two percent of the cumulative gross revenues of such facility, from the
date of inception of the Lodging Management Agreement for such facility
through the earlier of December 31, 2000 or the date of sale). "Net Excess
Sale Proceeds" is defined to be the gross property sales price for the
facility less (i) the reasonable costs incurred by the Company in connection
with the sale and (ii) a base amount assigned to each lodging facility. Any
future owners of such facility, and the Company to the extent that it retains
ownership of such facility after December 31, 2000, will not be subject to the
foregoing terms and will be required to pay to Marriott International the base
fee as set forth in the Lodging Management Agreement applicable to such
facility.
SENIOR LIVING SERVICES LEASE AGREEMENTS
As part of the Distribution, Marriott International entered into lease
agreements with the Company (the "Senior Living Services Lease Agreements") to
operate the 14 senior living facilities (including one under development) then
owned by the Company and its subsidiaries. Under the terms of the Senior
Living Services Lease Agreements, Marriott International will pay or reimburse
the Company for all costs and expenses (including property taxes) associated
with the facilities, and in addition will pay the Company (i) fixed rentals,
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aggregating $28 million a year for all 14 facilities and (ii) additional
rentals equal to 4.5 percent of annual revenues from operation of the
facilities in excess of $72 million per annum beginning in 1994. The Senior
Living Services Lease Agreements have initial terms of 20 years with renewal
options aggregating 20 years and contain other terms and conditions customary
for "triple net" leases. The Company sold these 14 senior living communities in
1994 to an unrelated party for $320 million.
CREDIT AGREEMENT
Marriott International and Holdings have entered into a Credit Agreement
pursuant to which Holdings has the right to borrow from Marriott International
up to $630 million. For a description of the Credit Agreement, see "Financing--
Credit Agreement."
PHILADELPHIA MORTGAGE
Marriott International is providing first mortgage financing for a portion of
the development and construction costs for the Philadelphia Marriott hotel (the
"Philadelphia Convention Center Hotel") constructed by the Company pursuant to
a mortgage financing agreement (the "Philadelphia Mortgage") entered into
between the Company and Marriott International. The Philadelphia Mortgage
provides for the funding of a portion (approximately 60 percent) of the
construction and development costs of such hotel, as and when such costs are
incurred, up to a maximum of $125 million of funding. The Philadelphia Mortgage
(i) is a two-year construction loan, convertible into a two-year "mini-perm"
facility upon completion of construction, carrying a floating interest rate of
LIBOR plus 300 basis points, and (ii) will, upon maturity of the two-year mini-
perm, fund into a ten-year term loan, bearing cash-pay interest at the rate of
ten percent per annum, plus deferred interest of two percent per annum. The
Philadelphia Mortgage is due on sale of the property (or any majority interest
therein) and is subject to other terms and conditions customary for first
mortgage financings of this type.
TAX SHARING AGREEMENT
The Company and Marriott International have entered into a tax sharing
agreement (the "Tax Sharing Agreement") that defines the parties' rights and
obligations with respect to deficiencies and refunds of federal, state and
other income or franchise taxes relating to the Company's businesses for tax
years prior to the Distribution and with respect to certain tax attributes of
the Company after the Distribution. In general, with respect to periods ending
on or before the last day of 1993, the Company is responsible for (i) filing
both consolidated federal tax returns for the Company affiliated group and
combined or consolidated state tax returns for any group that includes a member
of the Company affiliated group, including in each case Marriott International
and its subsidiaries for the relevant periods of time that such companies were
members of the applicable group, and (ii) paying the taxes relating to such
returns (including any subsequent adjustments resulting from the
redetermination of such tax liabilities by the applicable taxing authorities).
Marriott International will reimburse the Company for the portion of such taxes
relating to the Management Business. Marriott International is responsible for
filing returns and paying taxes related to the Management Business for
subsequent periods. The Company and Marriott International have agreed to
cooperate with each other and to share information in preparing such tax
returns and in dealing with other tax matters.
HOST CONSULTING AGREEMENT
Pursuant to the Host Consulting Agreement, effective October 8, 1993,
Marriott International has agreed to provide certain consulting and advisory
services to the Company and its subsidiaries with respect to certain
operational matters involving the Operating Group business (formerly known as
the "Host/Travel Plazas Business"). The Host Consulting Agreement has an annual
base fee of $500,000 and runs for an initial three-year term and thereafter
will automatically renew for additional one-year terms unless cancelled by
either party. If services under the Host Consulting Agreement require more than
500 employee-hours, Marriott International will be paid an additional amount
equal to 200 percent of the hourly compensation payable to
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the employee providing such consulting services. The Host Consulting Agreement
reflects the fact that the Host/Travel Plazas business comprising a portion of
the Operating Group business was in the past included within the Company's
contract services segment, most of which was transferred to Marriott
International. Accordingly, certain of the key executive employees of the
contract services group who were transferred to Marriott International will
continue to provide certain advisory services to the management of the Company
with respect to operating and personnel matters.
ASSIGNMENT AND LICENSE AGREEMENT
Pursuant to the terms of an Assignment and License Agreement, all of the
Company's right, title and interest in certain trademarks, including the
trademarks "Marriott," "Courtyard," "Residence Inns by Marriott" and "Fairfield
Inns by Marriott," were conveyed to Marriott International. The Company and its
subsidiaries have been granted a license to use such trademarks in their
corporate names and in connection with the Host/Travel Plazas Business, subject
to specified terms and conditions.
NONCOMPETITION AGREEMENT
The Company and Marriott International entered into a noncompetition
agreement (the "Noncompetition Agreement") that defines the parties' rights and
obligations with respect to certain businesses operated by Marriott
International and the Company. Under the Noncompetition Agreement, the Company
and its subsidiaries are prohibited from entering into, or acquiring an
ownership interest in any entity that operates, any business that competes with
the food and facilities management business as conducted by a former subsidiary
of the Company, Marriott Management Services, Inc. ("MMS," with such business
being referred to as the "MMS Business"), provided that such restrictions do
not apply to businesses that constitute part of the Host/Travel Plazas Business
as of the Distribution. Marriott International is prohibited from entering
into, or acquiring an ownership interest in any entity that operates any
business that competes with the Host/Travel Plazas Business, provided that such
restrictions do not apply to businesses that constitute part of the MMS
Business as of the Distribution. The Noncompetition Agreement confirms the
Company's right to compete in the hotel management business subject to certain
prohibited transactions. The Noncompetition Agreement has a seven-year term
that commenced on October 8, 1993.
TRANSITIONAL SERVICES AGREEMENTS
Marriott International and the Company entered into a number of agreements
pursuant to which Marriott International has agreed to provide certain
continuing services to the Company and its subsidiaries for a transitional
period. Such services are provided on market terms and conditions. Subject to
the termination provisions of the specific agreements, the Company and its
subsidiaries are free to procure such services from outside vendors or may
develop an in-house capability in order to provide such services internally.
The Company believes that these agreements are based on commercially reasonable
terms including pricing and payment terms. In general, the transitional
services agreements can be kept in place at least through 1997. The Company has
the right to terminate such agreements upon giving 180 day (or less) notice.
POLICIES AND PROCEDURES FOR ADDRESSING CONFLICTS
The on-going relationships between Marriott International and the Company may
present certain conflict situations for Messrs. J.W. Marriott, Jr. and Richard
E. Marriott, because J.W. Marriott, Jr. serves as Chairman of the Board of
Directors and President of Marriott International and also serves as a director
of the Company, and Richard E. Marriott serves as Chairman of the Board of
Directors of the Company and will assume the responsibilities as President and
Chief Executive Officer of the Company, effective May 1, 1995, until a
replacement for Stephen F. Bollenbach, current President and Chief Executive
Officer of the Company, is found. Richard E. Marriott also serves as a director
of Marriott International. Messrs. J.W. Marriott, Jr. and Richard E. Marriott,
as well as other executive officers and directors of the Company and
47
<PAGE>
Marriott International, also own (or have options or other rights to acquire) a
significant number of shares of common stock in both the Company and Marriott
International. The Company and Marriott International have adopted appropriate
policies and procedures to be followed by the Board of Directors of each
company to limit the involvement of Messrs. J.W. Marriott, Jr. and Richard E.
Marriott (or such other executive officers and directors having a significant
ownership interest in both companies) in conflict situations, including matters
relating to contractual relationships or litigation between the companies. Such
procedures include requiring Messrs. J.W. Marriott, Jr. and Richard E. Marriott
(or such other executive officers or directors having a significant ownership
interest in both companies) to abstain from making management decisions in
their capacities as officers of Marriott International and the Company,
respectively, and to abstain from voting as directors of either company, with
respect to matters that present a significant conflict of interest between the
companies. Whether or not a significant conflict of interest situation exists
is determined on a case-by-case basis depending on such factors as the dollar
value of the matter, the degree of personal interest of Messrs. J.W. Marriott,
Jr. or Richard E. Marriott (or such other executive officers and directors
having a significant ownership interest in both companies) in the matter, the
interests of the shareholders of the Company and the likelihood that resolution
of the matter has significant strategic, operational or financial implications
for the business of the Company. It is a principal responsibility of the
general counsel of the Company to monitor this issue in consultation with the
Audit Committee of the Board of Directors. See "Risk Factors--Potential
Conflicts with Marriott International."
48
<PAGE>
MANAGEMENT
BOARD OF DIRECTORS
The Company's Board of Directors consists of seven directors divided into
three classes, one class consisting of three directors and two classes
consisting of two directors. Each director serves a three-year term. Set forth
below is information with respect to those individuals serving as directors of
the Company.
<TABLE>
<CAPTION>
TERM
DIRECTOR EXPIRES OTHER POSITIONS
-------- ------- ---------------
<S> <C> <C>
Richard E. Marriott 1995 Mr. Richard Marriott is a director of Marriott
(1)(2) International, Inc. and Chairman of the Board of
Chairman of the Board First Media Corporation. He also serves as a di-
Director since 1979 rector of certain subsidiaries of the Company
Age: 56 and of Potomac Electric Power Company and is a
past President of the National Restaurant Asso-
ciation. For additional information on Mr.
Marriott, see "Executive Officers" below.
J.W. Marriott, Jr. (1) 1996 Mr. J.W. Marriott, Jr. is Chairman of the Board
Director since 1964 and President of Marriott International, Inc.
Age: 63 and a director of General Motors Corporation,
Outboard Marine Corporation and the U.S.-Russia
Business Roundtable. He also serves on the
Boards of Trustees of the Mayo Foundation and
the National Geographic Society, and on the Ad-
visory Board of the Boy Scouts of America. He is
on the President's Advisory Committee of the
American Red Cross and the Executive Committee
of the World Travel & Tourism Council.
R. Theodore Ammon 1995 Mr. Ammon is a private investor and Chairman of
Director since 1992 BFP Holdings Corp. and Big Flower Press, Inc. He
Age: 45 was formerly a general partner of Kohlberg
Kravis Roberts & Company (a New York and San
Francisco-based investment firm). He also serves
on the Boards of Directors of Astrum Interna-
tional Corp., Doskocil Companies, Inc. and the
New York YMCA, and on the Board of Trustees of
Bucknell University.
Stephen F. Bollenbach 1997 Mr. Bollenbach is President and Chief Executive
(2) Officer of the Company and serves as a director
President and Chief of certain subsidiaries of the Company. He also
Executive Officer serves on the Boards of Directors of America
Director since 1993 West Airlines, Inc., Carr Realty Corporation and
Age: 52 Mid-America Apartment Communities, Inc., and on
the CEO Magazine Advisory Board. For additional
information on Mr. Bollenbach, see "Executive
Officers" below.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
TERM
DIRECTOR EXPIRES OTHER POSITIONS
-------- ------- ---------------
<S> <C> <C>
Ann Dore McLaughlin 1997 Ms. McLaughlin is President of the Federal City
Director since 1993 Council and Vice Chairman of the Aspen Insti-
Age: 53 tute. She was formerly President and Chief Exec-
utive Officer of New American Schools Develop-
ment Corporation. Ms. McLaughlin has served with
distinction in several U.S. Administrations in
such positions as Secretary of Labor and Under
Secretary of the Department of the Interior. Ms.
McLaughlin also serves as a director of AMR Cor-
poration, Federal National Mortgage Association,
General Motors Corporation, Kellogg Company,
Nordstrom, Potomac Electric Power Company, Union
Camp Corporation and Vulcan Materials Company.
Additionally, Ms. McLaughlin serves as a member
of the governing boards of a number of civic,
non-profit organizations, including the Public
Agenda Foundation and the Conservation Fund. Ms.
McLaughlin is on the Board of Overseers for the
Wharton School of the University of Pennsylvania
and is a trustee of the Center for Strategic and
International Studies.
Harry L. Vincent, Jr. 1996 Mr. Vincent is a retired Vice Chairman of Booz-
Director since 1969 Allen & Hamilton, Inc. He also served as a di-
Age: 75 rector of Signet Banking Corporation from 1973
until 1989.
Andrew J. Young 1997 Mr. Young is Co-Chairman of the Atlanta Commit-
Director since 1993 tee for the Olympic Games. Mr. Young has spent
Age: 63 more than 35 years in public service. He was
elected to three terms in the U.S. Congress,
representing the Fifth Congressional District of
Georgia. In 1977 he was appointed U.S. Ambassa-
dor to the United Nations. He was elected mayor
of Atlanta, Georgia in 1981, and reelected in
1985. Mr. Young is a member of several addi-
tional boards including those of Howard Univer-
sity, The Martin Luther King, Jr. Center, the
Global Infrastructure Fund and the Center for
Global Partnership. He is also a member of the
Georgia Institute of Technology Advisory Board.
</TABLE>
- --------
(1) Richard E. Marriott and J.W. Marriott, Jr. are brothers.
(2) Effective May 1, 1995, Stephen F. Bollenbach will resign as Director,
President and Chief Executive Officer of the Company. Richard E. Marriott
will assume the responsibilities formerly held by Mr. Bollenbach until a
replacement is found.
COMPENSATION POLICY COMMITTEE
The Compensation Policy Committee comprises three directors who are not
employees of the Company or any of its subsidiaries: Harry L. Vincent
(Chairman), R. Theodore Ammon and Ann Dore McLaughlin. The committee's
functions include recommendations on policies and procedures relating to senior
officers' compensation and various employee stock plans and approvals of
individual salary adjustments and stock awards in those areas.
COMPENSATION OF DIRECTORS
Directors who are also officers of the Company receive no additional
compensation for their services as directors. Directors who are not officers of
the Company receive an annual retainer fee of $25,000, as well as
50
<PAGE>
an attendance fee of $1,250 for each shareholders' meeting, meeting of the
Board of Directors or meeting of a committee thereof, regardless of the number
of meetings held on a given day. The chair of each committee of the Board of
Directors receives an additional annual retainer fee of $1,000. Directors are
also reimbursed for travel expenses and other out-of-pocket costs incurred in
attending meetings. Mr. Vincent receives an additional $30,000 in compensation
to perform the annual performance appraisal of the chief executive officer on
behalf of the Board of Directors, although the final appraisal is determined by
the Board of Directors.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the persons who are
executive officers of the Company.
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE PRIOR TO BECOMING
NAME AND TITLE AGE AN EXECUTIVE OFFICER OF THE COMPANY
-------------- --- -------------------------------------
<S> <C> <C>
Richard E. Marriott (1) 56 Richard E. Marriott joined the Company in 1965
Chairman of the Board and has served in various executive capacities.
In 1979, Mr. Marriott was elected to the Board
of Directors. In 1984, he was elected Executive
Vice President and in 1986 he was elected Vice
Chairman of the Board of Directors. In 1993, Mr.
Marriott was elected Chairman of the Board. Mr.
Marriott also has been responsible for manage-
ment of the Company's government affairs func-
tions.
Stephen F. Bollenbach (1) 52 Stephen F. Bollenbach rejoined the Company in
Chief Executive Officer 1992 as Executive Vice President and Chief Fi-
and nancial Officer. He was named President and
President Chief Executive Officer of the Company in 1993.
During the period from 1982 to 1986, Mr. Bollen-
bach was Senior Vice President--Finance and
Treasurer of the Company. He subsequently served
as Chief Financial Officer of Promus Companies
from 1986 to 1990 and served as Chief Financial
Officer with the Trump Organization from 1990
until he rejoined the Company.
William W. McCarten 46 William W. McCarten joined the Company in 1979
Executive Vice President as Vice President and Controller--Corporate Ac-
and counting. He was promoted to Vice President and
President--Host/Travel Controller of the Roy Rogers Division in 1982
Plazas and became Vice President--Group Finance in
1984. He was named Vice President and Corporate
Controller in 1985. Mr. McCarten was elected Se-
nior Vice President--Finance and Corporate Con-
troller in 1986. In 1991, he was elected Execu-
tive Vice President and in 1992 was elected
President--Host/Travel Plazas.
Matthew J. Hart 42 Matthew J. Hart joined the Company in 1981 as
Executive Vice President Manager of Project Finance and was named Vice
and President of Project Finance in 1984. He was ap-
Chief Financial Officer pointed Assistant Treasurer in 1987 and was ap-
pointed Senior Vice President--Finance and Trea-
surer in 1991. Mr. Hart was named Executive Vice
President and Chief Financial Officer in 1993.
Prior to joining the Company, Mr. Hart spent
five years with Bankers Trust Company in the
corporate lending division.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE PRIOR TO BECOMING
NAME AND TITLE AGE AN EXECUTIVE OFFICER OF THE COMPANY
-------------- --- -------------------------------------
<S> <C> <C>
Stephen J. McKenna 54 Stephen J. McKenna joined the Company in 1973 as
Senior Vice President and an attorney. He was appointed Assistant General
General Counsel Counsel in 1976, and was promoted to Vice Presi-
dent and Assistant General Counsel in 1986. He
became Vice President and Associate General
Counsel in 1990 and became Senior Vice President
and General Counsel in 1993. Prior to joining
the Company, Mr. McKenna was employed as an at-
torney in the airline and aircraft manufacturing
industries.
Jeffrey P. Mayer 38 Jeffrey P. Mayer joined the Company in 1986 as
Senior Vice President-- Director--Corporate Accounting. He was promoted
Finance and Corporate to Assistant Controller--Corporate Accounting in
Controller 1987 and Vice President--Corporate Accounting in
1989. He was appointed Vice President--Project
Finance in the Company's Treasury Department in
1991 and Senior Vice President--Finance and Cor-
porate Controller in 1993. Prior to joining the
Company, Mr. Mayer spent eight years with Arthur
Andersen & Co.
</TABLE>
- --------
(1) Effective May 1, 1995, Stephen F. Bollenbach will resign as Director,
President and Chief Executive Officer of the Company. Richard E. Marriott
will assume the responsibilities formerly held by Mr. Bollenbach until a
replacement is found.
EXECUTIVE OFFICER COMPENSATION
Summary of Compensation. Table I below sets forth a summary of the
compensation paid by the Company for the last three fiscal years to its Chief
Executive Officer and four additional most highly compensated executive
officers.
TABLE I
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------- ------------------------ -------
RESTRICTED
STOCK SECURITIES LTIP
AWARDS UNDERLYING PAYOUTS ALL OTHER
NAME AND FISCAL SALARY(2) BONUS(3) (4)(5) OPTIONS (6) COMPENSATION(7)
PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($) ($)
------------------ ------ ---------- --------- ---------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard E. Marriott 1994 261,538 104,615 0 0 180,225 19,551
Chairman of the Board 1993 230,770 110,769 1,222,157(8) 0 0 10,693
1992 210,000 100,800 42,080 14,500 0 10,078
Stephen F. Bollenbach(1) 1994 550,000 385,000 0 0 901,125 50,062
Chief Executive Officer 1993 473,077 327,370 6,644,470(8) 0 0 13,077
and President 1992 380,769 255,115 304,156 193,000 0 150,000(9)
William W. McCarten 1994 300,000 270,000 0 0 402,503 22,426
Executive Vice President 1993 280,705 116,773 1,166,712(8) 0 0 12,854
1992 245,024 115,896 23,181 23,000 0 13,073
Matthew J. Hart 1994 275,000 178,750 0 0 324,405 22,455
Executive Vice President 1993 220,191 142,243 1,171,812(8) 0 0 11,172
1992 189,921 123,448 24,688 16,500 0 9,083
Stephen J. McKenna 1994 220,000 143,000 0 0 162,203 17,811
Senior Vice President 1993 195,178 119,009 595,482(8) 0 0 7,947
and General Counsel 1992 178,792 98,336 19,663 10,000 0 8,829
</TABLE>
52
<PAGE>
- --------
(1) Mr. Bollenbach joined the Company as Executive Vice President and Chief
Financial Officer on March 2, 1992.
(2) Salary amounts include base salary earned and paid in cash during the
fiscal year and the amount of base salary deferred at the election of the
executive officer under the Company's Employees' Profit Sharing, Retirement
and Savings Plan and Trust (the "Profit Sharing Plan") and the Company's
Executive Deferred Compensation Plan (the "Deferred Compensation Plan").
(3) Bonus includes the amount of cash bonus earned pursuant to the named
individual's bonus plan during the fiscal year and paid subsequent to the
end of each fiscal year.
(4) Under its long-term compensation program for executive officers, the
Company awards shares of restricted stock pursuant to the Company's 1993
Comprehensive Stock Incentive Plan (the "Comprehensive Stock Plan") and
previously awarded such shares under the Company's Restricted Stock Plan
for Key Employees (the "Company's Restricted Stock Plan") and the Company's
Deferred Stock Incentive Plan (the "Company's Deferred Stock Plan"),
predecessor plans to the Comprehensive Stock Plan. For Mr. R.E. Marriott
such restricted shares are as follows: for 1992, 963 shares of deferred
bonus stock awarded under the Company's Deferred Stock Plan and 1,275
shares of restricted stock awarded under the Company's Restricted Stock
Plan; for 1993, 2,411 shares of deferred bonus stock awarded under the
Company's Deferred Stock Plan and 160,000 shares awarded under the
Company's Comprehensive Stock Plan. For Mr. Bollenbach such restricted
shares are as follows: for 1992, 2,437 shares awarded under the Company's
Deferred Stock Plan and 15,000 shares awarded under the Company's
Restricted Stock Plan; for 1993, 7,124 shares awarded under the Company's
Deferred Stock Plan and 900,000 shares under the Company's Comprehensive
Stock Plan. For Mr. McCarten such restricted shares are as follows: for
1992, 1,107 shares awarded under the Company's Deferred Stock Plan; for
1993, 2,541 shares awarded under the Company's Deferred Stock Plan and
144,000 shares awarded under the Company's Comprehensive Stock Plan. For
Mr. Hart such restricted shares of stock are as follows: for 1992, 1,179
shares awarded under the Company's Deferred Stock Plan; for 1993, 3,096
shares awarded under the Company's Deferred Stock Plan and 144,000 shares
awarded under the Company's Comprehensive Stock Plan. For Mr. McKenna such
restricted shares are as follows: for 1992, 939 shares awarded under the
Company's Deferred Stock Plan; for 1993, 2,590 shares awarded under the
Company's Deferred Stock Plan and 72,000 shares awarded under the Company's
Comprehensive Stock Plan. The restricted shares reported in Table I and in
this footnote are shares subject to "General Restrictions" (see footnote 8
below). Restricted shares with "Performance Restrictions" (see footnote 8
below) awarded as long-term incentive plan ("LTIP") awards are excluded.
(5) The Deferred Stock Bonus Awards granted by the Company are generally
derived based on dividing twenty percent of each individual's annual cash
bonus award by the average of the high and low trading prices for a share
of Company Common Stock on the last trading day of the fiscal year. No
voting rights or dividends are attributed to award shares until such award
shares are distributed. Awards may be denominated as current awards or
deferred awards. A current award is distributed in 10 annual installments
commencing one year after the award is granted. A deferred award is
distributed in a lump sum or in up to 10 installments following termination
of employment. Deferred award shares contingently vest pro rata in annual
installments commencing one year after the Deferred Stock Bonus Award is
granted to the employee. Awards are not subject to forfeiture once the
employee reaches age 55 or after 10 years of service with the Company. The
aggregate number and value of shares of Company deferred stock and
restricted stock subject to "General Restrictions" and "Performance
Restrictions" (see footnote 8 below) held by each identified executive
officer as of the end of the fiscal year 1994 are as follows: Mr. R.E.
Marriott, 415,726 shares valued at $3,949,397; Mr. Bollenbach, 1,364,180
shares valued at $12,959,710; Mr. McCarten, 326,191 shares valued at
$3,098,815; Mr. Hart, 311,365 shares valued at $2,957,968; Mr. McKenna,
188,557 shares valued at $1,791,292. During the period in which any
restrictions apply, holders of restricted stock are entitled to receive all
dividends or other distributions paid with respect to such stock.
(6) For 1994, the amounts attributed to LTIP Payouts are the value for the
Performance-Based Restricted Stock Awards which were paid to the named
individuals following the close of the fiscal year. The value
53
<PAGE>
stated is the average of the high and low trading prices of a share of stock
on the date the performance restrictions were approved.
(7) With the exception of Mr. Bollenbach's amount for 1992, amounts included as
"All Other Compensation" represent matching Company contribution amounts
received under the Profit Sharing Plan and the Deferred Compensation Plan.
For Mr. R.E. Marriott, $3,420 was attributable to the Profit Sharing Plan
and $16,131 was attributable to the Deferred Compensation Plan. For Mr.
Bollenbach, $3,420 was attributable to the Profit Sharing Plan and $46,642
was attributable to the Deferred Compensation Plan. For Mr. McCarten,
$3,420 was attributable to the Profit Sharing Plan and $19,006 was
attributable to the Deferred Compensation Plan. For Mr. Hart, $3,420 was
attributable to the Profit Sharing Plan and $19,035 was attributable to the
Deferred Compensation Plan. For Mr. McKenna, $3,420 was attributable to the
Profit Sharing Plan and $14,391 was attributable to the Deferred
Compensation Plan.
(8) On October 17, 1993, the Compensation Policy Committee (the "Committee") of
the Board of Directors approved grants of restricted stock to certain key
employees of the Company, including Mr. McCarten, Mr. Hart and Mr. McKenna.
On October 29, 1993, the Board of Directors approved an award of restricted
stock to Mr. Bollenbach, and on December 2, 1993, the Board of Directors
approved a grant of restricted stock to Mr. R.E. Marriott. Each such grant
made in 1993 to Mr. R.E. Marriott, Mr. Bollenbach, Mr. McCarten, Mr. Hart
and Mr. McKenna consists of two awards: shares subject to restrictions
relating primarily to continued employment ("General Restrictions") which
vest ratably over a five or ten year period or at the end of a five or ten
year period and an award of shares subject to performance objectives such
as financial performance of the Company ("Performance Restrictions").
Performance objectives are established by the Committee and are subject to
periodic review and revision. All restricted stock awards subject only to
General Restrictions are presented on Table I as "Restricted Stock Awards,"
and the value stated in Table I is the fair market value on the date of the
grant.
(9) Mr. Bollenbach received a one-time payment of $150,000 pursuant to the
Company's relocation program.
54
<PAGE>
Aggregated Stock Option Exercises and Year-End Value. Table II below sets
forth, on an aggregated basis, information regarding the exercise during the
1994 fiscal year of options to purchase Company Common Stock by each of the
applicable persons listed on Table I above and the value on December 30, 1994
of all unexercised options held by such individuals. The Company did not grant
any stock options to the persons listed on Table I during fiscal year 1994.
TABLE II
AGGREGATED STOCK OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT FISCAL YEAR- VALUE OF UNEXERCISED
SHARES END IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE (#) FISCAL YEAR-END ($)(1)
EXERCISE REALIZED ------------------------- -------------------------
NAME COMPANY (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
R.E. Marriott........... HM 0 0 79,400 11,300 435,473 69,067
MI 0 0 79,400 11,300 836,709 146,961
Total 0 0 158,800 22,600 1,272,182 216,028
S.F. Bollenbach......... HM 0 0 96,500 96,500 598,392 598,392
MI 79,500 1,228,662 17,000 96,500 203,114 1,292,810
Total 79,500 1,228,662 113,500 193,000 801,507 1,891,202
W.W. McCarten........... HM 127,657 938,331 25,500 20,750 152,502 116,286
MI 20,050 385,882 52,250 20,750 415,532 230,516
Total 125,207 1,111,448 77,750 41,500 568,034 346,802
M.J. Hart............... HM 0 0 47,313 11,550 276,687 70,033
MI 33,463 423,188 13,850 11,550 163,628 147,735
Total 33,463 423,188 61,163 23,100 440,315 217,768
S.J. McKenna............ HM 0 0 93,257 7,700 570,667 47,023
MI 3,605 66,233 44,250 7,700 554,940 99,965
Total 3,605 66,233 137,507 15,400 1,125,608 146,989
</TABLE>
- --------
(1) Based on a per share price for Company Common Stock of $9.50 and a per
share price for Marriott International Common Stock of $27.94. These prices
represent the average of the high and low trading prices for a share on
December 30, 1994.
CERTAIN TRANSACTIONS
NEW YORK MARRIOTT MARQUIS
In 1985, the Company sold for $10.03 million a 10.32% equity interest in the
Times Square Hotel Company partnership ("TSHCO"), owner of the New York
Marriott Marquis Hotel, to MM Times Square Hotel Investors ("MM Times Square"),
a limited partnership which includes J.W. Marriott, Jr. and Richard E. Marriott
as partners. The Company received cash at closing of $3.15 million and a $6.88
million nonrecourse promissory note due September 1, 2015 with interest at 12%
per annum, collateralized by the ownership interest sold. At the same time, the
Company sold a 28.68% interest in TSHCO to an unrelated third-party for
approximately $26.3 million on essentially the same terms.
Preliminary agreements were reached in 1991 with the purchaser of the 28.68%
interest, and in 1992 with MM Times Square, to restructure the respective
promissory notes payable to the Company. During the fourth quarter of 1992, the
purchaser of the 28.68% interest informed the Company that he would not be
making further payments on his promissory note. In view of this action, the
restructurings of the promissory notes with both TSHCO and MM Times Square were
discontinued and, in the first quarter of 1994, the
55
<PAGE>
Company foreclosed on the 28.68% interest. The Company also accepted from MM
Times Square a transfer of a 7.23% equity interest in TSHCO in exchange for
cancellation of the outstanding debt. The Company currently holds an 86%
interest in TSHCO, which is consolidated in the Company's financial statements.
RELATIONSHIP BETWEEN THE COMPANY AND MARRIOTT INTERNATIONAL
The Company and its subsidiaries and Marriott International and its
subsidiaries have entered into certain relationships following the
Distribution. By reason of their ownership of shares of common stock of
Marriott International and their positions as Chairman and director,
respectively, J.W. Marriott, Jr. and Richard E. Marriott, who also are a
director and Chairman, respectively, of the Company, would be deemed in control
of Marriott International within the meaning of the federal securities laws.
Other members of the Marriott family might also be deemed control persons of
Marriott International by reason of their ownership of shares of Marriott
International and/or their relationship to other family members.
Prior to the Distribution, the Company and Marriott International entered
into the Distribution Agreement, which provided for, among other things, (i)
certain asset transfers to occur prior to the Distribution, (ii) the
Distribution, (iii) the division between the Company and Marriott International
of certain liabilities and (iv) certain other agreements governing the
relationship between the Company and Marriott International following the
Distribution. See "Relationship Between the Company and Marriott
International."
JOINT VENTURE WITH MARRIOTT INTERNATIONAL
During the third quarter of 1994, a joint venture between a subsidiary of the
Company and a subsidiary of Marriott International purchased the Leisure Park
at Lakewood Retirement Community in Lakewood, New Jersey. Through their
respective subsidiaries, the Company and Marriott International each hold a 5%
general partner interest and a 45% limited partner interest in the limited
partnership which owns a facility, with the Company's subsidiary acting as
managing general partner. The partners are currently engaged in arms-length
negotiations to amend and restate their partnership agreement relating to their
respective rights and obligations thereunder. The partnership is also
renegotiating the management agreement with a separate Marriott International
subsidiary which manages the facility.
SALE OF LAND PARCEL
During the second quarter of 1994, a subsidiary of the Company sold a parcel
of land in San Antonio, Texas to JWM Family Enterprises, L.P., a partnership
which is comprised of members of J.W. Marriott, Jr.'s immediate family. The
purchase price of $1.3 million was determined by using an appraisal prepared by
an unaffiliated, professional land appraisal firm. The partnership intends to
develop a Residence Inn on the land.
OWNERSHIP OF COMPANY SECURITIES
As of January 31, 1995, the Company had three outstanding classes of equity
or equity-linked securities: Common Stock Warrants to acquire shares of Common
Stock ("Warrants") and Convertible Preferred Stock. None of the directors,
nominees or executive officers owns shares of Convertible Preferred Stock. The
Company is not aware of any beneficial holder of 5% or more of the warrants.
Based upon a Schedule 13D filed with the Securities and Exchange Commission
on February 2, 1995, the Company believes that Joel M. Greenblatt of 100
Jericho Quadrangle, Jericho, New York, 11753, beneficially owns 24,300
depositary shares representing 24.3 shares of the Convertible Preferred Stock.
Such holdings represented 63.12% of the approximately 38,500 depositary shares
of Convertible Preferred Stock
56
<PAGE>
outstanding as of March 24, 1995, and are convertible into approximately
465,500 shares of Company Common Stock.
Set forth below is the ownership as of January 31, 1995 of Company Common
Stock by directors, the chief executive officer and the four additional most
highly compensated executive officers of the Company, as well as by all
directors and executive officers of the Company as a group, and to the best of
the Company's knowledge, beneficial holders of 5% or more of Company Common
Stock.
<TABLE>
<CAPTION>
SHARES OF COMPANY % OF SHARES
COMMON STOCK OUTSTANDING
BENEFICIALLY OWNED AS OF
NAME AS OF JANUARY 31, 1995 JANUARY 31, 1995
---- ---------------------- ----------------
<S> <C> <C>
DIRECTORS:
R. Theodore Ammon................... 10,000 0.01
Stephen F. Bollenbach............... 61,183(1) 0.04
J.W. Marriott, Jr................... 4,809,117(1)(2)(3) 3.12
Richard E. Marriott................. 6,102,746(1)(2)(3) 3.96
Ann Dore McLaughlin................. 1,000 0.00(4)
Harry L. Vincent, Jr................ 14,100 0.01
Andrew J. Young..................... 0 0.00
NON-DIRECTOR EXECUTIVE OFFICERS:
Matthew J. Hart..................... 22,671(1) 0.01
William W. McCarten................. 80,336(1) 0.05
Stephen J. McKenna.................. 9,032(1) 0.01
ALL DIRECTORS AND EXECUTIVE OFFICERS
AS A GROUP:........................ 11,117,040(5) 7.22
FORSTMANN-LEFF ASSOCIATES, INC.:.... 10,684,920(5) 6.94(5)
HARRIS ASSOCIATES L.P.:............. 8,575,065(6) 5.57(6)
</TABLE>
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(1) Does not include shares reserved, contingently vested or awarded under the
Company's 1993 Comprehensive Stock Incentive Plan. For additional
information, see Tables I and II.
(2) Does not include: (i) 1,568,298 shares held in trust for the children and
grandchildren of J.W. Marriott, Jr. or 1,096,357 shares held by his wife
and children; (ii) 1,408,768 shares held in trust for the children and
grandchildren of Richard E. Marriott or 374,240 shares held by his wife and
children; (iii) 2,536,787 shares held by the J. Willard Marriott
Foundation; (iv) 1,667,385 shares held by a charitable annuity trust,
created by the will of J.Willard Marriott, to which his descendants have a
remainder interest; (v) 2,707,590 shares held by a limited partnership
whose general partner is a corporation of which J.W. Marriott, Jr. is the
controlling shareholder; (vi) 80,000 shares held by a limited partnership
whose general partner is a corporation of which J.W. Marriott, Jr. is the
controlling shareholder; (vii) 2,302,729 shares held by a limited
partnership whose general partner is a corporation of which Richard E.
Marriott is the controlling shareholder; or (viii) 719,334 shares owned
directly or beneficially by certain other members of the Marriott family.
The shares referred to in this note aggregated 9.39% of the common shares
outstanding as of January 31, 1995.
(3) By virtue of their ownership of shares of common stock and their positions
as Chairman and director, respectively, Richard E. Marriott and J.W.
Marriott, Jr. would be deemed in control of the Company within the meaning
of the federal securities laws. Other members of the Marriott family might
also be deemed control persons by reason of their ownership of shares
and/or their relationship to other family members. J.W. Marriott, Jr.,
Richard E. Marriott, their mother Alice S. Marriott and other members of
the Marriott family and various trusts established by members of the
Marriott family owned beneficially an aggregate of 25,373,351 shares or
16.48% of the total common shares outstanding of the Company as of January
31, 1995. All directors and current executive officers as a group (other
than members of the Marriott family) owned beneficially an aggregate of
205,177 or 0.13% of the total common shares outstanding as of January 31,
1995. In addition, the Company's Employees' Profit Sharing, Retirement and
Savings Plan and Trust owned 865,755 shares or 0.56% of the total common
shares outstanding as of January 31, 1995.
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(4) Ownership of less than l/l00th of 1% is reflected as 0.00 in the table
above.
(5) Represents shares of Company Common Stock held by Forstmann-Leff
Associates, Inc. ("Forstmann") and its subsidiaries, FLA Asset Management,
Inc. ("FLA") and Stamford Advisors Corp. ("Stamford"). Forstmann has
reported in a Schedule 13G under the Securities and Exchange Act of 1934,
filed with the Securities and Exchange Commission, sole dispositive power
over 8,323,065 shares and shared dispositive power over 2,361,855 shares.
Of these shares, Forstmann has reported sole voting power over 6,541,365
shares and shared voting power over 867,300 shares. The principal business
address of Forstmann, FLA and Stamford is 55 East 52nd Street, New York,
New York 10055.
(6) Represents share of Company Common Stock held in client accounts managed by
Harris Associates L.P. and its general partner, Harris Associates, Inc.
(collectively, "Harris"). Harris has reported in a Schedule 13G under the
Securities and Exchange Act of 1934, filed with the Securities and Exchange
Commission, sole dispositive power over 6,703,365 share and shared
dispositive power over 1,871,700 shares. Of these shares, Harris has
reported sole voting power over none of the shares and shared voting power
over the entire 8,575,065 shares. The principal business address of Harris
is 2 North LaSalle Street, Suite 500, Chicago, Illinois 60602.
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DESCRIPTION OF THE WARRANTS
GENERAL
As part of the Class Action Settlement and pursuant to that certain
Stipulation and Agreement of Compromise and Settlement dated as of June 16,
1993 (the "Settlement Agreement"), the Company agreed to issue the Warrants to
the Initial Warrantholders as described in "Plan of Distribution." The Company
issued the Warrants pursuant to a Warrant Agreement (the "Warrant Agreement")
between the Company and First Chicago Trust Company of New York, as Warrant
Agent, in the manner described more fully in "Plan of Distribution." The
following summary of certain provisions of the Warrant Agreement does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Warrant Agreement, including the
definition of certain terms therein. A copy of the Warrant Agreement has been
filed as an exhibit to the registration statement of which this Prospectus is a
part. Wherever particular sections or defined terms of the Warrant Agreement
not otherwise defined herein are referred to, such section or defined terms
shall be incorporated herein by reference.
The Warrants are evidenced by warrant certificates (the "Warrant
Certificates"), a form of which is attached as an exhibit to the Warrant
Agreement. Each Warrant entitles the Warrantholder, at any time prior to 5:00
p.m. on October 8, 1998 (the "Expiration Time"), to purchase one share of
Common Stock from the Company at a price (the "Exercise Price") of (i) $8.00,
if exercised on or before 5:00 p.m. New York City time on October 8, 1996, or
(ii) $10.00, if exercised after 5:00 p.m. New York City time on October 8,
1996, but on or before 5:00 p.m. New York City time on October 8, 1998. Both
the Exercise Price and the number of shares subject to the Warrants are subject
to certain adjustments, as described below. Warrants that are not exercised
prior to the Expiration Time expire and become void.
Warrantholders will not be entitled to vote or to consent or to receive
notice as shareholders in respect of the meeting of shareholders or the
election of Directors of the Company or any other matter, or possess any rights
whatsoever as shareholders of the Company.
The Company has agreed to use its reasonable best efforts to maintain the
effectiveness under the Securities Act of the registration statement of which
this Prospectus is a part until the earlier of the Expiration Time or the date
on which all Warrants have been exercised, subject to the Company's right to
discontinue the effectiveness of such registration statement for such periods
as the Company determines are necessary and appropriate (any such period
referred to as a "Suspension Period"). The Company expects to exercise its
right to discontinue the effectiveness of the registration statement only (i)
if it determines that, based on circumstances arising after the date hereof,
the registration statement contains an untrue statement of material fact or
omits to state a material fact required to be stated therein in order to make
the statements therein not misleading or (ii) as may otherwise be required
under the Securities Act of 1933, as amended. During the pendency of any
Suspension Period, no Warrants may be exercised and no shares of Common Stock
may be issued upon the exercise of any Warrant.
The Company has also agreed to use its reasonable best efforts to obtain any
required approvals or registration under state securities laws for the issuance
of the Common Stock upon exercise of the Warrants. Under the Warrant Agreement,
however, Warrants may not be exercised by or, shares of Common Stock issued to,
any Warrantholder in any state where such exercise or issuance would be
unlawful.
The Warrants have no established trading market and no assurance can be given
that any such markets will develop. The Company does not intend to apply to
list the Warrants on any stock exchange. See "Risk Factors--Lack of Public
Market for the Warrants."
EXERCISE OF THE WARRANTS
The Warrants are exercisable at the election of the holder, in full or from
time to time in part, at any time prior to the Expiration Time, except that
Warrants may not be exercised during a Suspension Period. In
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the event of partial exercise of Warrants evidenced by a Warrant Certificate, a
new certificate evidencing the remaining Warrant or Warrants will be issued.
To exercise all or any of the Warrants represented by a Warrant Certificate,
the Warrantholder is required to surrender to the Warrant Agent the Warrant
Certificate, a duly executed copy of the Form of Election to Purchase (which is
set forth in the Warrant Certificate) and payment in full of the Exercise Price
for each share of Common Stock as to which a Warrant is exercised, which
payment may be made in cash or by certified or official bank check to the order
of the Company.
Upon the exercise of any Warrants in accordance with the Warrant Agreement,
the Company will issue and cause to be delivered to, or upon the written order
of, the holder, in such name or names as the Warrantholder may designate, a
certificate or certificates for the number of full shares of Common Stock
issuable upon the exercise of Warrants. Any shares of Common Stock issuable by
the Company upon the exercise of the Warrants must be validly issued, fully
paid and non-assessable.
PAYMENT OF TAXES AND OTHER COSTS
Warrantholders are required to pay any and all taxes payable (a) in respect
of the issuance of the Warrants or of the shares of Common Stock upon the
exercise of Warrants and (b) in respect of any transfer of any Warrant
Certificate or the issuance of any certificate for shares of Common Stock
issuable upon exercise of Warrants in a name other than that of the registered
holder of the Warrant Certificates surrendered upon the exercise of the
Warrant.
Any Warrantholder requesting transfer or exchange of any Warrant Certificates
pursuant to the Warrant Agreement is also required to pay any and all costs and
expenses of such transfer or exchange (including without limitation the fees
and expenses of the Warrant Agent in connection therewith).
The Company is not required to issue or deliver, transfer or exchange new
Warrant Certificates or issue or deliver shares of Common Stock upon exercise
of the Warrants unless and until the person requesting such issuance, delivery,
transfer or exchange shall have paid to the Company the amount of such taxes,
costs and expenses or established to the Company's satisfaction that such
taxes, costs and expenses have been paid.
NO FRACTIONAL SHARES
The Company will not issue warrants to purchase fractional shares of Common
Stock. As a result, the Warrants to which each Initial Warrantholder is
entitled will be rounded downward where the fractional portion of such
entitlement, if any, involves less than one-half of a Warrant or upward where
the fractional portion of such entitlement, if any, involves one-half or more
of a Warrant, subject to the overall limitation on the issuance of Warrants. In
the event of certain transactions described below, the number of shares of
Common Stock that may be purchased upon the exercise of each Warrant is subject
to adjustment. See "--Adjustment Provisions" below. The Company will not issue
fractional shares of Common Stock on the exercise of Warrants otherwise
issuable as a result of any of the aforementioned adjustments. If any fraction
of a share of Common Stock would be issuable on the exercise of any Warrants
(or portion thereof), the Company will pay to the exercising Warrantholders (in
lieu of issuance of such fractional share of Common Stock) an amount of cash
equal to the Exercise Price on the date the Warrant is presented for exercise,
multiplied by such fraction.
ADJUSTMENT PROVISIONS
The number of shares of Common Stock that may be purchased upon the exercise
of each Warrant and the Exercise Price are each subject to adjustment in the
event of certain transactions involving the Company, including (a)(i) issuing
shares of Common Stock as a stock dividend to the holders of Common Stock; (ii)
subdividing or combining the outstanding shares of Common Stock into a greater
or lesser number of shares; (iii) issuing shares of its capital stock other
than Common Stock as a distribution to the holders of Common
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Stock; (iv) issuing by reclassification of its Common Stock any shares of its
capital stock, (b) distributing any rights, options or warrants to all holders
of Common Stock entitling such holders to purchase shares of Common Stock at a
price per share less than the current market price per share on the record date
for such distribution, and (c) distributing to all holders of Common Stock any
of the assets or any rights or warrants to purchase assets or other securities
of the Company.
In case of any consolidation, merger or sale of all or substantially all of
the assets of the Company, upon the consummation of the transaction, the
Warrants automatically become exercisable for the kind and amount of
securities, cash or other assets which the holder of a Warrant would have owned
immediately after the consolidation, merger, transfer or lease if the holder
had exercised the Warrant immediately before the effective date of the
transaction.
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock is a summary and is
subject in all respects to applicable Delaware law and to the provisions of the
Company's Restated Certificate of Incorporation and shareholder's rights plan
listed as exhibits to the Registration Statement of which this Prospectus is a
part.
GENERAL
The Company's Restated Certificate of Incorporation (the "Company
Certificate") authorizes the issuance of a total of 301 million shares of all
classes of stock, of which one million may be shares of preferred stock,
without par value, and 300 million may be shares of Common Stock. At December
30, 1994, approximately 153.6 million shares of Common Stock were outstanding.
The Company Certificate provides that the Board is authorized to provide for
the issuance of shares of preferred stock, from time to time, in one or more
series, and to fix any voting powers, full or limited or none, and the
designations, preferences and relative, participating, optional or other
special rights, applicable to the shares to be included in any such series and
any qualifications, limitations or restrictions thereon.
COMMON STOCK
Voting Rights. Each holder of Common Stock is entitled to one vote for each
share registered in his name on the books of the Company on all matters
submitted to a vote of shareholders. Except as otherwise provided by law, the
holders of Common Stock vote as one class. The shares of Common Stock do not
have cumulative voting rights. As a result, subject to the voting rights, if
any, of the holders of any shares of the Company's preferred stock which may at
the time be outstanding, the holders of Common Stock entitled to exercise more
than 50% of the voting rights in an election of directors will be able to elect
100% of the directors to be elected if they choose to do so. In such event, the
holders of the remaining Common Stock voting for the election of directors will
not be able to elect any persons to the Board of Directors. The Company
Certificate provides that the Board of Directors is classified into three
classes, each serving a three year term, with one class to be elected in each
of three consecutive years.
Dividend Rights. Subject to the rights of the holders of any shares of the
Company's preferred stock which may at the time be outstanding, holders of
Common Stock are entitled to such dividends as the Board of Directors may
declare out of funds legally available therefor. The Company intends to retain
future earnings for use in its business and does not currently intend to pay
regular cash dividends. In addition, the Credit Agreement contains restrictions
on the payment of dividends on the Common Stock. See "Dividend Policies."
Liquidation Rights and Other Provisions. Subject to the prior rights of
creditors and the holders of any of the Company's preferred stock which may be
outstanding from time to time, the holders of Common Stock are entitled in the
event of liquidation, dissolution or winding up to share pro rata in the
distribution of all
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remaining assets. The Common Stock is not liable for any calls or assessments
and is not convertible into any other securities. The Company Certificate
provides that the private property of the shareholders shall not be subject to
the payment of corporate debts. There are no redemption or sinking fund
provisions applicable to the Common Stock, and the Company Certificate provides
that there shall be no preemptive rights.
The transfer agent and registrar for the Common Stock is First Chicago Trust
of New York.
RIGHTS AND JUNIOR PREFERRED STOCK
The Company has adopted a shareholder rights plan as set forth in that
certain Rights Agreement dated February 3, 1989, as amended, between the
Company and the Bank of New York, as rights agent (the "Rights Agreement"). The
following is a summary of the terms of the Rights Agreement.
Rights. Following the occurrence of certain events (the "Occurrence Date")
and except as described below, each right (a "Right," and, collectively, the
"Rights") will entitle the registered holder thereof to purchase from the
Company one one-thousandth of a share (a "Unit") of the Company's Series A
Junior Participating Preferred Stock ("Junior Preferred Stock") at a price (the
"Purchase Price") of $150 per Unit, subject to adjustment. The Rights are not
exercisable until the Occurrence Date. The Rights expire on the tenth
anniversary of the adoption of the Rights Agreement, unless exercised in
connection with a transaction of the type described below or unless earlier
redeemed by the Company.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a shareholder of the Company, including, without limitation, the right to
vote or to receive dividends.
Initially, ownership of the Rights will be attached to all Common Stock
certificates representing shares then outstanding, and no separate certificates
representing the Rights (the "Rights Certificates") will be distributed. Until
the Occurrence Date (or earlier redemption or expiration of the Rights), the
Rights will be transferable only with the Common Stock, and the surrender or
transfer of any certificate of Common Stock will also constitute the transfer
of the Rights associated with the Common Stock represented by such certificate.
The Rights will separate from the Common Stock and an Occurrence Date will
occur upon the earlier of (i) 10 days following the date (a "Stock Acquisition
Date") of a public announcement that a person or group of affiliates or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding Common Stock
or (ii) 10 business days following the commencement of or announcement of an
intention to make a tender offer or exchange offer, the consummation of which
would result in the Acquiring Person becoming the beneficial owner of 30% or
more of such outstanding Common Stock (such date being called the Occurrence
Date).
For purposes of the Rights Agreement, a person shall not be deemed to
beneficially own "Exempt Shares" which include (i) shares of Common Stock
acquired by such person by gift, bequest and certain other transfers, which
shares were Exempt Shares immediately prior to such transfer and were held by
such person continuously thereafter and (ii) shares acquired by such person in
connection with certain distributions of Common Stock with respect to Exempt
Shares which were held by such person continuously thereafter. In connection
with the Distribution, the Board amended the Rights Agreement to provide that
the shares of Common Stock acquired by Marriott International upon exercise of
the Marriott International Purchase Right will be deemed "Exempt Shares" under
the Rights Agreement, such that the exercise of such right by Marriott
International will not cause Marriott International to be deemed an "Acquiring
Person" under the Rights Agreement and thus trigger a distribution of the
Rights. See "Relationship Between the Company and Marriott International--
Marriott International Purchase Right."
As soon as practicable following an Occurrence Date, Rights Certificates will
be mailed to holders of record of Common Stock as of the close of business on
the Occurrence Date. After such time, such separate Rights Certificates alone
will evidence the Rights and could trade independently from the Common Stock.
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In the event (i) the Company is the surviving corporation in a merger with an
Acquiring Person and the Common Stock is not changed or exchanged, or (ii) an
Acquiring Person becomes the beneficial owner of 30% or more of the then
outstanding shares of Common Stock (except pursuant to an offer for all
outstanding shares of Common Stock which the Board determines to be fair to and
otherwise in the best interests of the Company and its shareholders), each
holder of a Right will, in lieu of the right to receive one one-thousandth of a
share of Junior Preferred Stock, thereafter have the right to receive, upon
exercise, Common Stock (or, in certain circumstances, cash, property or other
securities of the Company) having a value equal to two times the exercise price
of the Right. Notwithstanding any of the foregoing, following the occurrence of
any of the events set forth in this paragraph, all Rights that are (or, under
certain circumstances specified in the Rights Agreement, were) beneficially
owned by any Acquiring Person will be null and void. However, the Rights are
not exercisable following the occurrence of either of the events set forth
above until such time as the Rights are no longer redeemable by the Company as
set forth below.
For example, at an exercise price of $150 per Right, each Right not owned by
an Acquiring Person (or by certain related parties) following an event set
forth in the preceding paragraph would entitle its holder to purchase $300
worth of Common Stock (or other consideration, as noted above) for $150.
Assuming that the Common Stock had a per share value of $30 at such time, the
holder of each valid Right would be entitled to purchase 10 shares of Common
Stock for $150.
In the event that, at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation (other than a merger
described in the second preceding paragraph or a merger which follows an offer
described in the second preceding paragraph), or (ii) 50% or more of the
Company's assets or earning power is sold or transferred, each holder of a
Right (except Rights which previously have been voided as set forth above)
shall thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right.
In general, the Board may redeem the Rights in whole, but not in part, at any
time until 10 days following the Stock Acquisition Date, at a price of $.01 per
Right. After the redemption period has expired, the Company's right of
redemption may be reinstated if an Acquiring Person reduces its beneficial
ownership to 10% or less of the outstanding shares of Common Stock in a
transaction or series of transactions not involving the Company. Immediately
upon the action of the Board ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
$.01 per Right redemption price.
The purchase price payable, and the number of shares of Junior Preferred
Stock or other securities or property issuable upon exercise of the Rights are
subject to adjustment upon the occurrence of certain events with respect to the
Company, including stock dividends, sub-divisions, combinations,
reclassifications, rights or warrants offerings of Junior Preferred Stock at
less than the then current market price and certain distributions of property
or evidences of indebtedness of the Company to holders of Junior Preferred
Stock, all as set forth in the Rights Agreement.
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors, except pursuant to an offer
conditioned on a substantial number of Rights being acquired. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors since the Rights may be redeemed by the Company as set forth
above. See "Purposes and Antitakeover Effects of Certain Provisions of the
Company Certificate and Bylaws and the Marriott International Purchase Right."
Junior Preferred Stock. In connection with the Rights Agreement, 300,000
shares of Junior Preferred Stock are authorized and reserved for issuance by
the Board. No shares of Junior Preferred Stock are currently outstanding. The
following statements with respect to the Junior Preferred Stock are subject to
the detailed provisions of the Company Certificate and the certificate of
designation relating to the Junior
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Preferred Stock (the "Junior Preferred Stock Certificate of Designation"). The
material terms of the Junior Preferred Stock are summarized herein; however,
such summary is subject to the terms of the Company Certificate and the Junior
Preferred Stock Certificate of Designation.
Subject to the prior payment of cumulative dividends on any class of
preferred stock ranking senior to the Junior Preferred Stock, a holder of
Junior Preferred Stock will be entitled to cumulative dividends out of funds
legally available therefor, when, as and if declared by the Board, at a
quarterly rate per share of Junior Preferred Stock equal to the greater of (a)
$10.00 or (b) 1000 times (subject to adjustment upon certain dilutive events)
the aggregate per share amount of all cash dividends and 1000 times (subject to
adjustment upon certain dilutive events) the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions (other than
dividends payable in Common Stock or a sub-division of the outstanding shares
of Common Stock) declared on Common Stock, since the immediately preceding
quarterly dividend payment date for the Junior Preferred Stock (or since the
date of issuance of the Junior Preferred Stock if no such dividend payment date
has occurred).
A holder of Junior Preferred Stock will be entitled to 1000 votes (subject to
adjustment upon certain dilutive events) per share of Junior Preferred Stock on
all matters submitted to a vote of shareholders of the Company. Such holders
will vote together with the holders of the Common Stock as a single class on
all matters submitted to a vote of shareholders of the Company.
In the event of a merger or consolidation of the Company which results in
Common Stock being exchanged or changed for other stock, securities, cash
and/or other property, the shares of Junior Preferred Stock shall similarly be
exchanged or changed in an amount per share equal to 1000 times (subject to
adjustment upon certain dilutive events) the aggregate amount of stock,
securities, cash and/or other property, as the case may be, into which each
share of Common Stock has been exchanged or changed.
In the event of liquidation, dissolution or winding up of the Company, a
holder of Junior Preferred Stock will be entitled to receive $1000 per share,
plus accrued and unpaid dividends and distributions thereon, before any
distribution may be made to holders of shares of stock of the Company ranking
junior to the Junior Preferred Stock, and the holders of Junior Preferred Stock
are entitled to receive an aggregate amount per share equal to 1000 times
(subject to adjustment upon certain dilutive events) the aggregate amount to be
distributed per share to holders of Common Stock.
In the event that dividends on the Junior Preferred Stock are in arrears in
an amount equal to six quarterly dividends thereon, all holders of Junior
Preferred Stock, voting separately as a class with the holders of any other
series of preferred stock of the Company with dividends in arrears, will be
entitled to elect two Directors pursuant to provisions of the Company
Certificate. Such right to elect two additional directors shall continue at
each annual meeting until all dividends in arrears (including the then-current
quarterly dividend payment) have been paid or declared and set apart for
payment. Upon payment or declaration and reservation of funds for payment of
all such dividends, the term of office of each director elected shall
immediately terminate and the number of directors shall be such number as may
be provided for in the Company Certificate or Bylaws.
The Junior Preferred Stock is not subject to redemption. The terms of the
Junior Preferred Stock provide that the Company is subject to certain
restrictions with respect to dividends and distributions on and redemptions and
purchases of shares of stock of the Company ranking junior to or on a parity
with the Junior Preferred Stock in the event that payments of dividends or
other distributions payable on the Junior Preferred Stock are in arrears.
CONVERTIBLE PREFERRED STOCK
At December 30, 1994, the Company had outstanding 258,000 depositary shares
of Convertible Preferred Stock, each having a liquidation preference of $50 per
depositary share plus an amount equal to any accrued
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and unpaid dividends thereon. The Distribution did not affect the terms of the
Convertible Preferred Stock, which are set forth in the Company's Certificate
of Designation with respect to the Convertible Preferred Stock (the
"Convertible Preferred Stock Certificate of Designation"). However, pursuant to
Section 5(e)(iv) of the Convertible Preferred Stock Certificate of Designation,
the conversion price at which the Convertible Preferred Stock is convertible
into Common Stock after the Distribution was adjusted from $17.40 per share to
$2.61 per share. At the current conversion price of $2.61 per share, the
258,000 outstanding depositary shares of the Convertible Preferred Stock at
December 30, 1994 are convertible into approximately 5.0 million shares of
Common Stock. During the period from December 31, 1994 to March 24, 1995,
approximately 219,500 depositary shares of Convertible Preferred Stock were
converted into approximately 4.2 million shares of Common Stock. At March 24,
1995, approximately 39,500 depositary shares of Convertible Preferred Stock are
outstanding, which are convertible into approximately 737,000 shares of Common
Stock.
Pursuant to Section 6(c) of the Convertible Preferred Stock Certificate of
Designation, if the equivalent of six quarterly dividends payable on the
Convertible Preferred Stock are in arrears, the number of directors of the
Company will be increased by two and the holders of Convertible Preferred Stock
voting separately as a class with the holders of shares of any one or more
other series of preferred stock ranking on a parity with the Convertible
Preferred Stock whether as to payment of dividends or the distribution of
assets and upon which like voting rights have been conferred and are
exercisable, will be entitled to elect two directors for one year terms to fill
such vacancies at the Company's next annual meeting of shareholders. Such right
to elect two additional directors shall continue at each subsequent annual
meeting until all dividends in arrears have been paid or declared and set apart
for payment. Upon payment or declaration and reservation of funds for payment
of all such dividends in arrearage, the term of office of each director elected
shall immediately terminate and the number of directors constituting the entire
Board of Directors of the Company shall be reduced by the number of directors
elected by the holders of the Convertible Preferred Stock and any other series
of preferred stock ranking on a parity with the Convertible Preferred Stock as
discussed above. The Company presently does not intend to pay Preferred Stock
dividends. See "Dividend Policy." The Company has not paid six quarterly
dividend payments since the Distribution and, accordingly, the holders of the
Convertible Preferred Stock would be entitled to elect two members of the Board
of Directors. Commencing January 15, 1996, the outstanding Convertible
Preferred Stock may be redeemed at an aggregate redemption price of $2 million
plus accrued and unpaid dividends.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material federal income tax consequences
of the acquisition, ownership and disposition of the Warrants.
The discussion is based upon the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the applicable Treasury Regulations promulgated
and proposed thereunder, judicial authority and current administrative rulings
and practice. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the validity of
the statements and conclusions set forth below. Any such changes or
interpretations may be retroactive and could affect the continued validity of
the discussion. This discussion does not purport to deal with all aspects of
federal income taxation that might be relevant to particular Warrantholders in
light of their personal investment circumstances or status, nor does it discuss
the federal income tax consequences to certain types of Warrantholders subject
to special treatment under the federal income tax laws, such as certain
financial institutions, insurance companies, dealers in securities, tax-exempt
organizations, foreign corporations or nonresident alien individuals. Moreover,
the effect of any applicable state, local or foreign tax laws is not discussed.
The federal income tax treatment of the receipt of the Warrants by the Initial
Warrantholders will vary depending on the facts and circumstances of each such
holder. Initial Warrantholders should consult their own tax advisors regarding
the proper federal income tax treatment of the receipt of the Warrants.
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Except as otherwise indicated below, this discussion assumes that the
Warrants (and any Common Stock acquired pursuant to the exercise of a Warrant)
are or will be held as capital assets (as defined in Section 1221 of the Code)
by the holders thereof. The Internal Revenue Service (the "Service") may take a
contrary view as to the foregoing and other assumptions, and if the Service is
successful in asserting such contrary views, the federal income tax
consequences to the Warrantholders may differ from those described below.
SALE OF THE WARRANTS
Generally, a Warrantholder will recognize gain or loss upon the sale of the
Warrants in an amount equal to the difference between the amount realized on
the sale and the holder's adjusted tax basis for the Warrants. Under Section
1234 of the Code, gain or loss attributable to the sale of an option to buy or
sell property is considered gain from the sale of property which has the same
character as the property to which the option relates. Since the Warrants
relate to stock, gains or losses attributable to the sale of the Warrants will
generally constitute capital gains and losses and will be long-term if the
Warrants have been held for more than one year and if the stock would be a
capital asset in the hands of the holder.
EXERCISE OF THE WARRANTS
The exercise of a Warrant with cash will not result in a taxable event to the
holder of the Warrant. The difference between the value of the shares received
and the exercise price, plus the basis, of the Warrant will only be recognized
for tax purposes if the shares are subsequently sold or redeemed. Upon exercise
of a Warrant for cash, the Warrantholder's basis in the shares of Common Stock
issued thereunder will be the sum of (a) its basis in the Warrant and (b) the
exercise price of the Warrant. The holding period for capital gains purposes
for the shares of Common Stock acquired upon exercise of a Warrant will not
include the period during which the Warrant was held. [If any cash is received
in lieu of fractional shares, the holder will recognize gain or loss, and the
character and amount of gain or loss will be determined as if the holder had
received such fractional shares and then immediately resold them for cash.]
EXPIRATION OF THE WARRANTS
Upon the expiration of an unexercised Warrant, the Warrantholder will
recognize a loss equal to the adjusted tax basis of the Warrant in the hands of
the holder. Under Section 1234 of the Code, the character of the loss realized
upon the failure to exercise an option is determined based on the character or
the property to which the option relates. Since the Warrant relates to stock, a
loss realized upon expiration of the Warrant will generally be a capital loss
and will be long term if the Warrant was held for more than one year and if the
stock would have been a capital asset in the hands of the Warrantholder.
ADJUSTMENTS UNDER THE WARRANTS
Pursuant to the terms of the Warrants, the number of shares of Common Stock
purchasable upon exercise of the Warrants is subject to adjustment from time to
time upon the occurrence of certain events. Under Section 305 of the Code, a
change in conversion ratio or any transaction having a similar effect on the
interest of a holder of the Warrants may be treated as a distribution with
respect to any holder of the Warrants whose proportionate interest in the
earnings and profits of the Company is increased by such change or transaction.
Thus, under certain future circumstances which may or may not occur, such an
adjustment pursuant to the terms of the Warrants may be treated as a taxable
distribution to the holders of the Warrants, to the extent of the Company's
current or accumulated earning and profits, without regard to whether the
holders of the Warrants receive any cash or other property. For example, if the
Company distributes a cash or property dividend to its shareholders and a
related adjustment is made to the number of shares purchasable upon exercise of
the Warrants, such an adjustment will generally be treated as a taxable
distribution to the Warrantholders, despite the fact that the Warrantholders
receive no cash or property. If the holders of the Warrants receive such a
taxable distribution their bases in the Warrants will be increased by an amount
equal to the taxable distribution.
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The rules with respect to adjustments are complex and Warrantholders should
consult their own tax advisors in the event of an adjustment.
BACKUP WITHHOLDING
The backup withholding rules require the Company to deduct and withhold
federal income tax at the rate of 31% with respect to payments made to
noncorporate holders who are not otherwise exempt if (a) the holder fails to
furnish a taxpayer identification number ("TIN") to the Company, (b) the IRS
notifies the Company that the TIN furnished by the holder is incorrect, (c)
there has been notified payee underpaying, or (d) there has been payee
certification failure. Any amounts withheld from a payment to a holder under
the backup withholding rules will be allowed as a refund or credit against such
holder's federal income tax, provided that the required information is
furnished to the IRS.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS DOES
NOT CONSIDER THE FACTS AND CIRCUMSTANCES OF ANY PARTICULAR PROSPECTIVE
PURCHASER'S SITUATION OR STATUS. THE SUMMARY IS BASED ON THE PROVISIONS OF THE
CODE, REGULATIONS, PROPOSED REGULATION, RULINGS AND JUDICIAL DECISIONS NOW IN
EFFECT, ALL OF WHICH ARE SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE BASIS.
EACH WARRANTHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO
THE TAX CONSEQUENCES TO SUCH WARRANTHOLDER, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAW, ARISING OUT OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE WARRANTS.
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PRICE RANGE OF THE COMMON STOCK AND DIVIDENDS
The Common Stock is listed on the New York Stock Exchange and on several
regional exchanges, and since consummation of the Distribution is traded under
the symbol "HMT." The following table sets forth, for the fiscal periods
indicated, the high and low sales prices per share of the Common Stock as
reported on the New York Stock Exchange Composite Tape and the cash dividends
paid per share of Common Stock. All periods presented in the table below prior
to the fourth quarter of 1993 are prior to the Distribution. Therefore, those
stock prices and dividends paid are not indicative of the Company's current
stock price or dividend policies. The Company currently intends to retain
future earnings, if any, for use in its business and does not anticipate paying
regular cash dividends on the Common Stock. See "Dividend Policy." As of
December 30, 1994, there were approximately 72,000 holders of record of Common
Stock.
<TABLE>
<CAPTION>
CASH
DIVIDENDS
HIGH LOW PAID
------- ------- ---------
<S> <C> <C> <C>
1993
1st Quarter......................................... $27 3/8 $20 3/4 $.07
2nd Quarter......................................... 26 5/8 24 .07
3rd Quarter......................................... 29 24 3/8 .07
4th Quarter(1)...................................... 33 3/8 27 5/8 --
4th Quarter(2)...................................... 10 6 1/8 --
1994
1st Quarter......................................... $13 3/4 $ 8 3/4 --
2nd Quarter......................................... 11 1/8 8 3/4 --
3rd Quarter......................................... 11 7/8 9 1/2 --
4th Quarter......................................... 11 1/2 8 1/4 --
1995
1st Quarter......................................... $11 1/4 $ 9 3/8 --
2nd Quarter (through April 10, 1995)................ 12 10 1/4 --
</TABLE>
- --------
(1) Pre-Distribution
(2) Post-Distribution
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PLAN OF DISTRIBUTION
The Warrants offered hereby were distributed to the Initial Warrantholders as
part of the Class Action Settlement pursuant to the Settlement Agreement, which
was approved by the United States District Court for the District of Maryland
(the "Court") on September 10, 1993. See "Risk Factors--Pending Litigation."
As part of the Class Action Settlement, 5,775,000 Warrants were distributed
to purchasers of the Company's senior notes between July 11, 1991 and October
5, 1992 who sold such senior notes on or after October 5, 1992 and prior to
September 10, 1993 and who suffered a loss on such purchase and sale. Under the
terms of the Class Action Settlement, in order to receive Warrants, members of
the plaintiff class satisfying the above criteria were required to file a proof
of claim with the settlement fund administrator retained by the Class Action
Plaintiffs to determine the total recognized loss from eligible claims.
Pursuant to the Court's order dated June 10, 1994, the total recognized loss
approved by the Court was $14,329,027, which means that each approved claimant
received .403 Warrants for each dollar of recognized loss, except that no
fractional warrants were issued. See "Description of Warrants--No Fractional
Shares." Also, as part of the Class Action Settlement, counsel to the
plaintiffs in the Class Action Lawsuits received 1,925,000 Warrants in payment
of such counsel's fees and expenses. The plaintiffs who received Warrants as
part of the Class Action Settlement and counsel to plaintiffs in the Class
Action Lawsuit are sometimes referred to in this Prospectus as the "Initial
Warrantholders."
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PURPOSES AND ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS
OF THE COMPANY CERTIFICATE AND BYLAWS AND THE
MARRIOTT INTERNATIONAL PURCHASE RIGHT
COMPANY CERTIFICATE AND BYLAWS
The Company Certificate contains several provisions that will make difficult
an acquisition of control of the Company, by means of a tender offer, open
market purchases, a proxy fight or otherwise, that is not approved by the
Board. The Company's Bylaws (the "Bylaws") also contain provisions that could
have an antitakeover effect.
The purposes of the relevant provisions of the Company Certificate and Bylaws
are to discourage certain types of transactions, described below, which may
involve an actual or threatened change of control of the Company and to
encourage persons seeking to acquire control of the Company to consult first
with the Board of Directors to negotiate the terms of any proposed business
combination or offer. The provisions are designed to reduce the vulnerability
of the Company to an unsolicited proposal for a takeover that does not
contemplate the acquisition of all outstanding shares or is otherwise unfair to
shareholders of the Company or an unsolicited proposal for the restructuring or
sale of all or part of the Company. The Company believes that, as a general
rule, such proposals would not be in the best interests of the Company and its
shareholders.
There has been a history of the accumulation of substantial stock positions
in public companies by third parties as a prelude to proposing a takeover or a
restructuring or sale of all or part of the company or another similar
extraordinary corporate action. Such actions are often undertaken by the third-
party without advance notice to, or consultation with, the management or board
of directors of the target company. In many cases, the purchaser seeks
representation on the company's board of directors in order to increase the
likelihood that its proposal will be implemented by the company. If the company
resists the efforts of the purchaser to obtain representation on the company's
board, the purchaser may commence a proxy contest to have its nominees elected
to the board in place of certain directors or the entire board. In some cases,
the purchaser may not truly be interested in taking over the company, but may
use the threat of a proxy fight and/or a bid to take over the company as a
means of forcing the company to repurchase its equity position at a substantial
premium over market price.
The Company believes that the imminent threat of removal of the Company's
management or Board in such situations would severely curtail the ability of
management or the Board to negotiate effectively with such purchasers. The
management or the Board would be deprived of the time and information necessary
to evaluate the takeover proposal, to study alternative proposals and to help
ensure that the best price is obtained in any transaction involving the Company
which may ultimately be undertaken. If the real purpose of a takeover bid were
to force the Company to repurchase an accumulated stock interest at a premium
price, management or the Board would face the risk that, if it did not
repurchase the purchaser's stock interest, the Company's business and
management would be disrupted, perhaps irreparably.
Certain provisions of the Company Certificate and Bylaws, in the view of the
Company, will help ensure that the Board, if confronted by a surprise proposal
from a third-party which has acquired a block of stock, will have sufficient
time to review the proposal and appropriate alternatives to the proposal and to
act in what it believes to be the best interests of the shareholders. In
addition, certain other provisions of the Company Certificate are designed to
prevent a purchaser from utilizing two-tier pricing and similar inequitable
tactics in the event of an attempt to take over the Company.
These provisions, individually and collectively, will make difficult and may
discourage a merger, tender offer or proxy fight, even if such transaction or
occurrence may be favorable to the interests of the shareholders, and may delay
or frustrate the assumption of control by a holder of a large block of stock of
the Company and the removal of incumbent management, even if such removal might
be beneficial to the shareholders. Furthermore, these provisions may deter or
could be utilized to frustrate a future takeover attempt which is not approved
by the incumbent Board of Directors, but which the holders of a majority of
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the shares may deem to be in their best interests or in which shareholders may
receive a substantial premium for their stock over prevailing market prices of
such stock. By discouraging takeover attempts, these provisions might have the
incidental effect of inhibiting certain changes in management (some or all of
the members of which might be replaced in the course of a change of control)
and also the temporary fluctuations in the market price of the stock which
often result from actual or rumored takeover attempts.
Set forth below is a description of such provisions in the Company
Certificate and Bylaws. Such description is intended as a summary only and is
qualified in its entirety by reference to the Company Certificate and Bylaws
which are exhibits to the Registration Statement on Form S-1 of which this
Prospectus is a part.
Classified Board of Directors. The Company Certificate provides for the Board
to be divided into three classes serving staggered terms so that directors'
current terms will expire either at the 1995, 1996 or 1997 annual meeting of
shareholders. See "Management--Board of Directors."
The classification of directors will have the effect of making it more
difficult for shareholders to change the composition of the Board in a
relatively short period of time. At least two annual meetings of shareholders,
instead of one, will generally be required to effect a change in a majority of
the Board. Such a delay may help ensure that the Board, if confronted by a
holder attempting to force a stock repurchase at a premium above market prices,
a proxy contest or an extraordinary corporate transaction, will have sufficient
time to review the proposal and appropriate alternatives to the proposal and to
act in what it believes are the best interests of the shareholders.
The classified board provision could have the effect of discouraging a third-
party from making a tender offer or otherwise attempting to obtain control of
the Company, even though such an attempt might be beneficial to the Company and
its shareholders. The classified board provision could thus increase the
likelihood that incumbent directors will retain their positions. In addition,
since the classified board provision is designed to discourage accumulations of
large blocks of the Company's stock by purchasers whose objective is to have
such stock repurchased by the Company at a premium, the classified board
provision could tend to reduce the temporary fluctuations in the market price
of the Company's stock that could be caused by accumulations of large blocks of
such stock. Accordingly, shareholders could be deprived of certain
opportunities to sell their stock at a temporarily higher market price.
The Company believes that a classified board of directors helps to assure the
continuity and stability of the Board and business strategies and policies as
determined by the Board, because generally a majority of the directors at any
given time will have had prior experience as directors of the Company. The
classified board provision also helps assure that the Board, if confronted with
an unsolicited proposal from a third party that has acquired a block of the
voting stock of the Company, will have sufficient time to review the proposal
and appropriate alternatives and to seek the best available result for all
shareholders.
Removal; Filling Vacancies. The Company Certificate provides that, subject to
any rights of the holders of preferred stock, only a majority of the Board then
in office shall have the authority to fill any vacancies on the Board,
including vacancies created by an increase in the number of directors. In
addition, the Company Certificate provides that a new director elected to fill
a vacancy on the Board will serve for the remainder of the full term of his or
her class and that no decrease in the number of directors shall shorten the
term of an incumbent. Moreover, the Company Certificate provides that directors
may be removed with or without cause only by the affirmative vote of holders of
at least 66 2/3% of the voting power of the shares entitled to vote at the
election of directors, voting together as a single class. These provisions
relating to removal and filling of vacancies on the Board will preclude
shareholders from enlarging the Board or removing incumbent directors and
filling the vacancies with their own nominees.
Limitations on Shareholder Action By Written Consent; Special Meetings. The
Company Certificate and Bylaws provide that shareholder action can be taken
only at an annual or special meeting of shareholders and prohibit shareholder
action by written consent in lieu of a meeting. The Company Certificate and
Bylaws
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provide that, subject to the rights of holders of any series of preferred
stock, special meetings of shareholders can be called only by a majority of the
entire Board. Shareholders are not permitted to call a special meeting or to
require that the Board call a special meeting of shareholders. Moreover, the
business permitted to be conducted at any special meeting of shareholders is
limited to the business brought before the meeting by or at the direction of
the Board.
The provisions of the Company Certificate and Bylaws restricting shareholder
action by written consent may have the effect of delaying consideration of a
shareholder proposal until the next annual meeting unless a special meeting is
called by a majority of the entire Board. These provisions would also prevent
the holders of a majority of the voting power of the voting stock from using
the written consent procedure to take shareholder action and from taking action
by consent without giving all the shareholders of the Company entitled to vote
on a proposed action the opportunity to participate in determining such
proposed action. Moreover, a shareholder could not force shareholder
consideration of a proposal over the opposition of the Company Board by calling
a special meeting of shareholders prior to the time the Board believed such
consideration to be appropriate.
The Company believes that such limitations on shareholder action will help to
assure the continuity and stability of the Board and the Company's business
strategies and policies as determined by the Board, to the benefit of all of
the Company's shareholders. If confronted with an unsolicited proposal from
Company shareholders, the Board will have sufficient time to review such
proposal and to seek the best available result for all shareholders, before
such proposal is approved by such shareholders by written consent in lieu of a
meeting or through a special meeting of shareholders.
Nominations of Directors and Shareholder Proposals. The Bylaws establish an
advance notice procedure with regard to the nomination, other than by or at the
direction of the Board, of candidates for election as directors (the
"Nomination Procedure") and with regard to shareholder proposals to be brought
before an annual or special meeting of shareholders (the "Business Procedure").
The Nomination Procedure provides that only persons who are nominated by or
at the direction of the Board of Directors, or by a shareholder who has given
timely prior written notice to the Secretary of the Company prior to the
meeting at which directors are to be elected, will be eligible for election as
directors. The Business Procedure provides that shareholder proposals must be
submitted in writing in a timely manner in order to be considered at any annual
or special meeting. To be timely, notice must be received by the Company (i) in
the case of an annual meeting, not less than 90 days prior to the annual
meeting for a director nomination, and not less than 120 days prior to the
annual meeting for a shareholder proposal or (ii) in the case of a special
meeting not later than the seventh day following the day on which notice of
such meeting is first given to shareholders for both a director nomination and
a shareholder proposal.
Under the Nomination Procedure, notice to the Company from a shareholder who
proposes to nominate a person at a meeting for election as a director must
contain certain information about that person, including age, business and
residence addresses, principal occupation, the class and number of shares of
Common Stock beneficially owned, the consent to be nominated and such other
information as would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee, and certain information about
the shareholder proposing to nominate that person. Under the Business
Procedure, notice relating to a shareholder proposal must contain certain
information about such proposal and about the shareholder who proposes to bring
the proposal before the meeting, including the class and number of shares of
Common Stock beneficially owned by such shareholder. If the Chairman or other
officer presiding at a meeting determines that a person was not nominated in
accordance with the Nomination Procedure, such person will not be eligible for
election as a director, or if he determines that the shareholder proposal was
not properly brought before such meeting, such proposal will not be introduced
at such meeting. Nothing in the Nomination Procedure or the Business Procedure
will preclude discussion by any shareholder of any nomination or proposal
properly made or brought before an annual or special meeting in accordance with
the above-mentioned procedures.
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The purpose of the Nomination Procedure is, by requiring advance notice of
nomination by shareholders, to afford the Board a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Board, to inform shareholders about such
qualifications. The purpose of the Business Procedure is, by requiring advance
notice of shareholder proposals, to provide a more orderly procedure for
conducting annual meetings of shareholders and, to the extent deemed necessary
or desirable by the Board, to provide the Board with a meaningful opportunity
to inform shareholders, prior to such meetings, of any proposal to be
introduced at such meetings, together with any recommendation as to the Board's
position or belief as to action to be taken with respect to such proposal, so
as to enable shareholders better to determine whether they desire to attend
such meeting or grant a proxy to the Board as to the disposition of any such
proposal. Although the Bylaws do not give the Board any power to approve or
disapprove shareholder nominations for the election of directors or of any
other proposal submitted by shareholders, the Bylaws may have the effect of
precluding a nomination for the election of directors or precluding the
conducting of business at a particular shareholder meeting if the proper
procedures are not followed, and may discourage or deter a third-party from
conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of the Company, even if the conduct of
such solicitation or such attempt might be beneficial to the Company and its
shareholders.
Fair Price Provision. Article Fifteenth of the Company Certificate (the "Fair
Price Provision") requires the approval by the holders of 66 2/3% of the voting
power of the outstanding capital stock of the Company entitled to vote
generally in the election of directors (the "Voting Stock") as a condition for
mergers and certain other business combinations ("Business Combinations")
involving the Company and any holder of more than 25% of such voting power (an
"Interested Shareholder") unless the transaction is either (i) approved by a
majority of the members of the Board who are not affiliated with the Interested
Shareholder and who were directors before the Interested Shareholder became an
Interested Shareholder (the "Disinterested Directors") or (ii) certain minimum
price and procedural requirements are met.
The Fair Price Provision is designed to prevent a third-party from utilizing
two-tier pricing and similar inequitable tactics in a takeover attempt. The
Fair Price Provision is not designed to prevent or discourage tender offers for
the Company. It does not impede an offer for at least 66 2/3% of the Voting
Stock in which each shareholder receives substantially the same price for his
or her shares as each other shareholder or which the Board has approved in the
manner described herein. Nor does the Fair Price Provision preclude a third-
party from making a tender offer for some of the shares of Voting Stock without
proposing a Business Combination in which the remaining shares of Voting Stock
are purchased. Except for the restrictions on Business Combinations, the Fair
Price Provision will not prevent an Interested Shareholder having a controlling
interest of the Voting Stock from exercising control over the Company or
increasing its interest in the Company. Moreover, an Interested Shareholder
could increase its ownership to 66 2/3% and avoid application of the Fair Price
Provision. However, the separate provisions contained in the Company
Certificate and the Bylaws relating to "Classified Boards of Directors"
discussed above will, as therein indicated, curtail an Interested Shareholder's
ability to exercise control in several respects, including such shareholder's
ability to change incumbent directors who may oppose a Business Combination or
to implement a Business Combination by written consent without a shareholder
meeting. The Fair Price Provision would, however, discourage some takeover
attempts by persons intending to acquire the Company in two steps and to
eliminate remaining shareholder interests by means of a business combination
involving less consideration per share than the acquiring person would propose
to pay for its initial interest in the Company. In addition, acquisitions of
stock by persons attempting to acquire control through market purchases may
cause the market price of the stock to reach levels which are higher than would
otherwise be the case. The Fair Price Provision may thereby deprive some
holders of the Common Stock of an opportunity to sell their shares at a
temporarily higher market price.
Although the Fair Price Provision is designed to help assure fair treatment
of all shareholders vis-a-vis other shareholders in the event of a takeover, it
is not the purpose of the Fair Price Provision to assure that shareholders will
receive a premium price for their shares in a takeover. Accordingly, the Board
is of the
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view that the adoption of the Fair Price Provision does not preclude the
Board's opposition to any future takeover proposal which it believes would not
be in the best interests of the Company and its shareholders, whether or not
such a proposal satisfies the minimum price criteria and procedural
requirements of the Fair Price Amendment.
In addition, under Section 203 of the Delaware General Corporation Law as
applicable to the Company, certain "business combinations" (defined generally
to include (i) mergers or consolidations between a Delaware corporation and an
interested shareholder (as defined below) and (ii) transactions between a
Delaware corporation and an interested shareholder involving the assets or
stock of such corporation or its majority-owned subsidiaries, including
transactions which increase the interested shareholder's percentage ownership
of stock) between a Delaware corporation, whose stock generally is publicly
traded or held of record by more than 2,000 shareholders, and an interested
shareholder (defined generally as those shareholders, who, on or after December
23, 1987, become beneficial owners of 15 percent or more of a Delaware
corporation's voting stock) are prohibited for a three-year period following
the date that such shareholder became an interested shareholder, unless (i)
prior to the date such shareholder became an interested shareholder, the board
of directors of the corporation approved either the business combination or the
transaction which resulted in the shareholder becoming an interested
shareholder, (ii) upon consummation of the transaction that made such
shareholder an interested shareholder, the interested shareholder owned at
least 85 percent of the voting stock of the corporation outstanding at the time
the transaction commenced (excluding voting stock owned by officers who also
are directors and voting stock held in employee benefit plans in which the
employees do not have a confidential right to tender or vote stock held by the
plan), or (iii) the business combination was approved by the board of directors
of the corporation and ratified by two-thirds of the voting stock which the
interested shareholder did not own. The three-year prohibition also does not
apply to certain business combinations proposed by an interested shareholder
following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had been an interested
shareholder during the previous three years or who became an interested
shareholder with the approval of a majority of the corporation's directors.
Shareholder Rights Plan. The Company has adopted a shareholder rights plan
which may have anti-takeover effects. See "Description of Capital Stock-Rights
and Junior Preferred Stock."
Amendment of the Company Certificate and Bylaws. The Company Certificate
contains provisions requiring the affirmative vote of the holders of at least
66 2/3% the voting power of the stock entitled to vote generally in the
election of directors to amend certain provisions of the Company Certificate
and Bylaws (including the provisions discussed above). These provisions make it
more difficult for shareholders to make changes in the Company Certificate or
Bylaws, including changes designed to facilitate the exercise of control over
the Company. In addition, the requirement for approval by at least a 66 2/3%
shareholder vote will enable the holders of a minority of the Company's capital
stock to prevent holders of a less-than-66 2/3% majority from amending such
provisions of the Company's Certificate or Bylaws.
MARRIOTT INTERNATIONAL PURCHASE RIGHT
Pursuant to the terms of the Distribution Agreement, the Company granted to
Marriott International, for a period of ten years following the Distribution,
the right to purchase a number of shares equal in amount of up to 20% of each
class of the Company's outstanding voting stock at the then fair market value
upon the occurrence of certain change of control events involving the Company.
The Marriott International Purchase Right may be exercised for a 30-day period
following the date a person or group of affiliated persons has (i) become the
beneficial owner of 20% or more of the total voting power of the then
outstanding shares of the Company's voting stock or (ii) announced a tender
offer for 30% or more of the total voting power of the then outstanding shares
of the Company's voting stock. These change of control events upon which the
Marriott International Purchase Right becomes exercisable are substantially
identical to those events that cause a distribution of the Rights under the
Rights Agreement (see "Description of Capital Stock--Rights and Junior
Preferred Stock"). Accordingly, certain share ownership of the Company's voting
stock by
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specified persons that is exempt under the Rights Agreement, and consequently
will not result in a distribution of Rights, also will not cause the Marriott
International Purchase Right to become exercisable.
The Board amended the terms of the Rights Agreement to provide that the
exercise of the Marriott International Purchase Right will not result in a
distribution of the Rights. Accordingly, upon exercise of the Marriott
International Purchase Right, Marriott International will be entitled to
receive the Rights associated with the Common Stock and will not be deemed an
"Acquiring Person" under the Rights Agreement.
The purchase price for the Common Stock to be purchased upon the exercise of
the Marriott International Purchase Right is determined by taking the average
of the closing sale price of the Common Stock during the 30 consecutive trading
days preceding the date the Marriott International Purchase Right becomes
exercisable. The specific terms of the Marriott International Purchase Right
are set forth in the Distribution Agreement.
The Marriott International Purchase Right will have an antitakeover effect.
Any person considering acquiring a substantial or controlling block of Common
Stock would face the possibility that its ability to exercise control would be
impaired by Marriott International's 20% ownership resulting from exercise of
the Marriott International Purchase Right. So long as the Marriott family's
current percentage of ownership of Common Stock continues, the combined
Marriott family (including various trusts established by members of the
Marriott family) and Marriott International ownership following exercise of the
Marriott International Purchase Right would effectively block control by others
(see "Description of Capital Stock"). It is also possible that the exercise
price of the Marriott International Purchase Right would be lower than the
price at which a potential acquiror might be willing to purchase a 20% block of
shares of Common Stock because the purchase price for the Marriott
International Purchase Right is based on the average trading price during a 30-
day period which may be prior to the announcement of the takeover event. This
potential price differential may have a further antitakeover effect by
discouraging potential acquirers of the Company. The antitakeover effect of the
Marriott International Purchase Right will be in addition to the antitakeover
effects of the provisions contained in the Company Certificate and Bylaws.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon for the
Company by Christopher G. Townsend, Esq., Senior Vice President and Deputy
General Counsel of the Company, and certain legal matters with respect to the
Common Stock offered hereby has been passed upon for the Company by Potter,
Anderson & Corroon, Wilmington, Delaware.
Mr. Townsend owns Common Stock, and holds stock options, deferred stock and
restricted stock awards under the Comprehensive Stock Plan and may receive
additional awards under the plan in the future.
EXPERTS
The audited consolidated financial statements and schedules of the Company
included in this Prospectus and elsewhere in this Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto and have been included herein
in reliance upon the authority of said firm as experts in giving said reports.
75
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Equity............................ F-6
Consolidated Statements of Cash Flows...................................... F-7
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheets of Host Marriott
Corporation (formerly Marriott Corporation) and subsidiaries as of December 30,
1994 and December 31, 1993, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three fiscal
years in the period ended December 30, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
Marriott Corporation and subsidiaries as of December 30, 1994 and December 31,
1993, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended December 30, 1994 in conformity with
generally accepted accounting principles.
As discussed in Notes 3 and 6 to the consolidated financial statements, in
1993 the Company changed its methods of accounting for assets held for sale and
income taxes.
Arthur Andersen LLP
Washington, D.C.
February 24, 1995
F-2
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1994 AND DECEMBER 31, 1993
(IN MILLIONS)
<TABLE>
<CAPTION>
1994 1993
------ ------
ASSETS
<S> <C> <C>
Property and Equipment........................................... $3,156 $3,026
Investments in Affiliates........................................ 203 220
Notes Receivable................................................. 50 111
Accounts Receivable.............................................. 102 80
Inventories...................................................... 40 52
Other Assets..................................................... 176 256
Cash and Cash Equivalents........................................ 95 103
------ ------
$3,822 $3,848
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Debt carrying a company guarantee of repayment................. $1,495 $1,700
Debt not carrying a company guarantee of repayment............. 764 779
------ ------
2,259 2,479
Accounts Payable and Accrued Expenses............................ 208 194
Deferred Income Taxes............................................ 453 442
Other Liabilities................................................ 192 208
Convertible Subordinated Debt.................................... -- 20
------ ------
Total Liabilities............................................ 3,112 3,343
------ ------
Shareholders' Equity
Convertible Preferred Stock.................................... 13 14
Common Stock, 300 million shares authorized; 153.6 million
shares and 129.7 million shares issued and outstanding, re-
spectively.................................................... 154 130
Additional Paid-in Capital..................................... 479 253
Retained Earnings.............................................. 64 108
------ ------
Total Shareholders' Equity................................... 710 505
------ ------
$3,822 $3,848
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 30, 1994 AND DECEMBER 31, 1993
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
REVENUES
Real Estate Group
Hotels..................................................... $ 340 $ 606
Senior living communities.................................. 14 67
Net gains (losses) on property transactions................ 6 (1)
------ ------
360 672
------ ------
Operating Group
Airports................................................... 747 690
Travel Plazas.............................................. 304 296
Other...................................................... 90 95
------ ------
1,141 1,081
------ ------
Total revenues........................................... 1,501 1,753
------ ------
OPERATING COSTS AND EXPENSES
Real Estate Group
Hotels..................................................... 200 498
Senior living communities.................................. 5 58
Other...................................................... 8 25
------ ------
213 581
------ ------
Operating Group
Airports................................................... 712 659
Travel Plazas.............................................. 292 282
Other...................................................... 93 97
------ ------
1,097 1,038
------ ------
Total operating costs and expenses....................... 1,310 1,619
------ ------
OPERATING PROFIT
Real Estate Group............................................ 147 91
Operating Group.............................................. 44 43
------ ------
Operating profit before corporate expenses, interest and
profit from distributed operations.......................... 191 134
Corporate expenses............................................. (37) (41)
Interest expense............................................... (206) (201)
Interest income................................................ 29 26
Profit from operations distributed to Marriott International... -- 211
------ ------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES......... (23) 129
Benefit (provision) for income taxes........................... 4 (72)
------ ------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES........................... (19) 57
Extraordinary item--Loss on extinguishment of debt (net of
income taxes of $3 million in 1994 and $4 million in 1993).... (6) (5)
Cumulative effect of a change in accounting for income taxes... -- 30
Cumulative effect of a change in accounting for assets held for
sale (net of income taxes of $22 million)..................... -- (32)
------ ------
NET INCOME (LOSS).............................................. (25) 50
Dividends on preferred stock................................... -- (8)
------ ------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK................... $ (25) $ 42
====== ======
EARNINGS (LOSS) PER COMMON SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES........................... $ (.13) $ .40
Extraordinary item--Loss on extinguishment of debt (net of
income taxes)................................................. (.04) (.04)
Cumulative effect of a change in accounting for income taxes... -- .25
Cumulative effect of a change in accounting for assets held for
sale (net of income taxes).................................... -- (.26)
------ ------
NET INCOME (LOSS).............................................. $ (.17) $ .35
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 1, 1993
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
1992
------
<S> <C>
SALES
Lodging............................................................... $4,551
Contract Services..................................................... 4,171
------
8,722
------
OPERATING COSTS AND EXPENSES
Lodging............................................................... 4,218
Contract Services..................................................... 4,021
------
8,239
------
OPERATING PROFIT
Lodging............................................................... 333
Contract Services..................................................... 150
------
Operating profit before corporate expenses and interest............... 483
Corporate expenses, (including restructuring charges of $21 million).... (129)
Interest expense........................................................ (235)
Interest income......................................................... 31
------
INCOME BEFORE INCOME TAXES.............................................. 150
Provision for income taxes.............................................. (65)
------
NET INCOME.............................................................. 85
Dividends on preferred stock............................................ (17)
------
NET INCOME AVAILABLE FOR COMMON STOCK................................... $ 68
======
EARNINGS PER COMMON SHARE:
NET INCOME.............................................................. $ .64
======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
<TABLE>
<CAPTION>
COMMON CONVERTIBLE ADDITIONAL
SHARES PREFERRED COMMON PAID-IN RETAINED TREASURY
OUTSTANDING STOCK STOCK CAPITAL EARNINGS STOCK
----------- ----------- ------ ---------- -------- --------
(IN MILLIONS) (IN MILLIONS, EXCEPT PER COMMON SHARE)
<C> <S> <C> <C> <C> <C> <C>
95.5 Balance, January 3,
1992................... $ 200 $105 $ 35 $ 583 $(244)
-- Net income.............. -- -- -- 85 --
5.3 Common stock issued for
employee stock
purchase, stock option,
and profit sharing
plans.................. -- -- 1 (68) 135
-- Cash dividends on common
stock ($.28 per share)
and preferred stock
($4.125 per share)..... -- -- -- (45) --
-- Foreign currency
translation
adjustments............ -- -- (2) -- --
- -----------------------------------------------------------------------------------------
100.8 Balance, January 1,
1993................... 200 105 34 555 (109)
-- Net income.............. -- -- -- 50 --
-- Distribution of stock of
Marriott International,
Inc.................... -- -- (40) (417) --
7.9 Common stock issued for
the comprehensive stock
and employee stock
purchase plans -- 4 13 (58) 109
-- Cash dividends on common
stock ($.14 per share)
and preferred stock
($2.062 per share)..... -- -- -- (22) --
8.3 Conversion of
subordinated debt...... -- 8 15 -- --
1.8 Common stock issued in
conjunction with the
Exchange Offer......... -- 2 58 -- --
10.9 Conversion of preferred
stock to common stock.. (186) 11 175 -- --
-- Foreign currency
translation
adjustments............ -- -- (2) -- --
- -----------------------------------------------------------------------------------------
129.7 Balance, December 31,
1993................... 14 130 253 108 --
-- Net loss................ -- -- -- (25) --
-- Adjustment to
distribution of stock
of Marriott
International, Inc..... -- -- -- (19) --
2.5 Common stock issued for
the comprehensive stock
and employee stock
purchase plans......... -- 2 15 -- --
.7 Conversion of
subordinated debt to
common stock........... -- 1 1 -- --
.6 Conversion of preferred
stock to common stock.. (1) 1 -- -- --
20.1 Common stock issued in
stock offering......... -- 20 210 -- --
- -----------------------------------------------------------------------------------------
153.6 Balance, December 30,
1994................... $ 13 $154 $479 $ 64 $ --
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................... $ (25) $ 50 $ 85
Adjustments to reconcile to cash from operations:
Depreciation and amortization......................... 174 265 284
Income taxes.......................................... (18) 11 (28)
Extraordinary loss on extinguishment of debt, net of
taxes................................................ 6 5 --
Cumulative effect of changes in accounting principles,
net.................................................. -- 2 --
Restructuring charges................................. -- 20 21
Proceeds from sales of timeshare notes receivable..... -- -- 41
Amortization of deferred income....................... (5) (14) (19)
Fairfield Inn net realizable value write-down......... -- 11 --
Equity in net income (losses) of affiliates........... -- 27 24
Other................................................. 35 23 (23)
Changes in operating accounts:
Accounts receivable................................. (6) (101) (40)
Inventories......................................... -- (10) (16)
Accounts payable and accrued expenses............... (3) 132 (14)
Other............................................... -- 8 106
----- ----- -------
Cash from continuing operations....................... 158 429 421
Cash used in discontinued operations.................. -- -- (11)
----- ----- -------
Cash from operations.................................. 158 429 410
----- ----- -------
INVESTING ACTIVITIES
Proceeds from sales of assets........................... 480 83 484
Less non-cash proceeds................................ (54) (5) (97)
----- ----- -------
Cash received from sales of assets...................... 426 78 387
Capital expenditures for renewals and replacements...... (62) (60) (57)
Acquisitions............................................ (532) (29) (47)
Acquisition funds held in escrow........................ 40 (40) --
Lodging construction funded by project financing........ (67) (40) --
Other capital expenditures.............................. (69) (135) (153)
Purchases of short-term marketable securities........... (90) -- --
Sales of short-term marketable securities............... 90 -- --
Notes receivable collections............................ 60 37 12
Affiliate collections (advances), net................... 10 (45) (51)
Other................................................... 2 (28) (43)
----- ----- -------
Cash (used in) from investing activities................ (192) (262) 48
----- ----- -------
FINANCING ACTIVITIES
Issuances of debt....................................... 211 375 917
Issuances of common stock............................... 238 12 7
Scheduled principal repayments.......................... (72) (471) (1,124)
Debt prepayments........................................ (351) -- (55)
Dividends paid.......................................... -- (33) (41)
Cash distributed to Marriott International.............. -- (272) --
----- ----- -------
Cash from (used in) financing activities................ 26 (389) (296)
----- ----- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (8) (222) 162
CASH AND CASH EQUIVALENTS, beginning of year............ 103 325 163
----- ----- -------
CASH AND CASH EQUIVALENTS, end of year.................. $ 95 $ 103 $ 325
===== ===== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The structure of Host Marriott Corporation (the "Company," formerly Marriott
Corporation) was substantially altered on October 8, 1993 (the "Distribution
Date") when the Company distributed the stock of a wholly-owned subsidiary,
Marriott International, Inc. ("Marriott International") in a special dividend
(the "Distribution"). See Note 2 for a description of the Distribution and
related transactions. As of December 30, 1994, the Company owned 119 lodging
properties generally operated under Marriott brand names and generally managed
by Marriott International. The Company also holds minority interests in various
partnerships that own over 260 additional properties operated by Marriott
International. The Company's properties span several market segments, including
full-service (hotels, resorts and suites), moderate-priced (Courtyard by
Marriott), and extended-stay (Residence Inn by Marriott).
The Company also operates restaurants, gift shops and related facilities at
over 70 airports, on 14 tollroads (including over 95 travel plazas) and at more
than 35 tourist attractions, stadiums and arenas. Many of the Company's
concessions operate under branded names utilizing franchise and license
agreements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries and controlled affiliates. Investments in 50% or less owned
affiliates over which the Company has the ability to exercise significant
influence are accounted for using the equity method. The Company's equity in
net income (losses) of these affiliates is included in the Real Estate Group's
other operating costs and expenses for 1994 and 1993. All material intercompany
transactions and balances have been eliminated.
The Company's financial statements include the results of operations and cash
flows of Marriott International through the Distribution Date. Marriott
International's results of operations through the Distribution Date included in
the accompanying consolidated financial statements consist of the following:
<TABLE>
<CAPTION>
1993 1992
------- -------
(IN MILLIONS)
<S> <C> <C>
Sales...................................................... $ 5,555 $ 6,971
Operating Costs and Expenses............................... (5,283) (6,645)
Corporate Expenses......................................... (46) (67)
Net Interest Expense....................................... (15) (22)
------- -------
Income Before Income Taxes............................... $ 211 $ 237
======= =======
</TABLE>
Financial Statement Presentation
As a result of the Distribution and its effect on the structure of the
Company, the Company has altered its financial statement presentation to better
reflect the Company's current business segments and operating environment.
Certain financial statement information for 1993, as presented in prior
filings, has been reformatted and reclassified to reflect the Company's current
business segments and operating environment. Additionally, the Company's assets
are primarily related to its Real Estate Group and, accordingly, the balance
sheet has been presented in a non-classified format. Financial statement
information for 1992 is presented as previously filed.
F-8
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31 for U.S.
operations and on November 30 for most non-U.S. operations. Fiscal 1994, 1993
and 1992, which ended December 30, 1994, December 31, 1993 and January 1, 1993
for U.S. Operations, respectively, include 52 weeks.
Revenues and Expenses
Subsequent to the Distribution, revenues for the Real Estate Group include
house profit from the Company's owned hotel properties, lease rentals for the
Company's owned senior living communities and net gains (losses) on property
transactions. House profit represents hotel operating results, less property-
level expenses, excluding depreciation, real and personal property taxes,
ground rent, insurance and management fees, which are classified as operating
costs and expenses. Operating Group revenues and expenses include sales and
related costs of food, beverage and merchandise concession operations of
airports, travel plazas and other locations.
Prior to the Distribution, Real Estate Group, or Lodging, revenues included
room sales and food and beverage sales at both owned and managed hotel
properties, franchise fees for franchised hotel properties, sales of timeshare
units, and sales from senior living communities. Operating Group, or Contract
Services, revenues included sales of food, beverages and merchandise at various
airports, travel plazas and other locations, as well as contract revenue from
various facility management contracts, and distribution service revenues. In
1993, revenues related to Marriott International are included in profits from
operations distributed to Marriott International in the accompanying statement
of operations.
Prior to the Distribution, the Company operated 388 hotels under long-term
management agreements whereby payments to owners were based primarily on hotel
profits. Working capital and operating results of managed hotels operated with
the Company's employees were consolidated because the operating
responsibilities associated with such hotels were substantially the same as
those for owned and leased hotels.
Earnings (Loss) Per Common Share
Earnings (loss) per common share are computed on a fully diluted basis by
dividing net income (loss) available for common stock by the weighted average
number of outstanding common and common equivalent shares, plus other
potentially dilutive securities, aggregating 151.5 million in 1994, 121.3
million in 1993 and 106.5 million in 1992. Common equivalent shares and other
potentially dilutive securities have been excluded from the weighted average
number of outstanding shares for 1994 as they are anti-dilutive.
During 1993, the Company issued 1.8 million common shares to former holders
of certain Senior Notes and debentures of the Company as part of the Exchange
Offer, 10.9 million common shares to former holders of the Company's preferred
stock and during 1993 and 1994, 9.0 million common shares to holders of the
LYONs notes upon their conversion (see Note 9). Supplemental earnings per
share, giving effect to the transactions discussed above as if they had
occurred as of the first day of the period presented, was $.42 and $.74 for the
fiscal years ended December 31, 1993 and January 1, 1993, respectively.
Weighted average shares outstanding, giving effect to the transactions
discussed above as if they had occurred as of the first day of the period
presented, were 138 million and 128 million for the fiscal years ended December
31, 1993 and January 1, 1993, respectively.
International Operations
The consolidated statements of operations include the following amounts
related to non-U.S. subsidiaries and affiliates; revenues of $258 million in
1993 (including $223 million related to Marriott International) and
F-9
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$355 million in 1992, and income before income taxes of $26 million in 1993 and
$24 million in 1992. International sales and income before income taxes,
subsequent to the Distribution, were not material.
Property and Equipment
Property and equipment is recorded at cost, including interest, rent and real
estate taxes incurred during development and construction. Replacements and
improvements are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to 10
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related buildings.
Gains on sales of properties are recognized at the time of sale or deferred
to the extent required by generally accepted accounting principles. Deferred
gains are recognized as income in subsequent periods as conditions requiring
deferral are satisfied or expire without further cost to the Company.
In cases where management is holding for sale particular lodging properties,
the Company assesses impairment based on whether the net realizable value
(estimated sales price less costs of disposal) of each individual property to
be sold is less than the net book value. A lodging property is considered to be
held for sale when the Company has made the decision to dispose of the
property. Otherwise, the Company assesses impairment of its real estate
properties based on whether it is probable that undiscounted future cash flows
from each individual property will be less than its net book value.
Inventories
Merchandise, food items and supplies are stated at the lower of average cost
or market. Senior living service condominium units held for sale are carried at
a cost of $3 million and $14 million at December 30, 1994 and December 31,
1993, respectively, which did not exceed the net realizable value.
Intangible Assets
Intangible assets amounted to $22 million and $25 million at December 30,
1994 and December 31, 1993, respectively, and primarily consist of contract
rights. These intangibles are included in other assets and are being amortized
on a straight-line basis over periods of five to 40 years. Amortization expense
totalled $3 million in 1994, $26 million in 1993, and $33 million in 1992.
Pre-Opening Costs
Costs of an operating nature incurred prior to opening of lodging and senior
living service properties are deferred and amortized over three years. Such
costs, which are included in other assets, amounted to $6 million and $16
million at December 30, 1994 and December 31, 1993, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Self-Insurance Programs
Prior to the Distribution Date, the Company was self-insured for certain
levels of general liability, workers' compensation and employee medical
coverage. Estimated costs of these self-insurance programs
F-10
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
were accrued at present values of projected settlements for known and
anticipated claims. The Company discontinued its self-insurance programs for
claims arising subsequent to the Distribution Date.
Interest Rate Swap Agreements
The Company has entered into interest rate swap agreements to diversify a
portion of its debt to a variable rate basis. The interest rate differential to
be paid or received on interest rate swap agreements is accrued as interest
rates change and is recognized as an adjustment to interest expense.
New Statements of Financial Accounting Standards
The Company adopted Statements of Financial Accounting Standards ("SFAS") No.
112, "Employers' Accounting for Postemployment Benefits," and SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," during
1994. Adoption of these statements did not have a material effect on the
Company's consolidated financial statements. The Company is also required to
adopt SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," no
later than its fiscal year ending December 29, 1995. Adoption of SFAS No. 114
will not have any material effect on the Company's consolidated financial
statements.
2. THE DISTRIBUTION
On October 8, 1993 (the "Distribution Date"), Marriott Corporation
distributed, through a special tax-free dividend (the "Distribution"), to
holders of Marriott Corporation's common stock (on a share-for-share basis),
approximately 116.4 million outstanding shares of common stock of an existing
wholly-owned subsidiary, Marriott International, resulting in the division of
Marriott Corporation's operations into two separate companies. The distributed
operations included the former Marriott Corporation's lodging management,
franchising and resort timesharing operations, senior living service
operations, and the institutional food service and facilities management
business. The Company retained the former Marriott Corporation's airport and
tollroad food, beverage and merchandise concessions operations, as well as most
of its real estate properties. Effective at the Distribution Date, Marriott
Corporation changed its name to Host Marriott Corporation. Subsequent to the
Company's announcement in late 1992 of the planned Distribution, the Company
recorded a reserve of $21 million, representing management's best estimate, at
that time, of the anticipated costs to complete the Distribution. During 1993,
the Company recognized an additional $13 million of charges based on
management's revised estimate of the ultimate cost of completing the
Distribution. The costs include $30 million payable to attorneys, investment
bankers, consultants and financial institutions, and $4 million in employee
compensation awards. Substantially all of the unpaid costs at December 31, 1993
were paid during 1994. The other notes to the financial statements discuss
further the agreements and events relating to the Distribution.
In connection with the Distribution, the Company completed an exchange offer
("Exchange Offer") pursuant to which holders of senior notes in an aggregate
principal amount of approximately $1.2 billion ("Old Notes") exchanged such Old
Notes for a combination of (i) cash, (ii) common stock and (iii) New Notes
("New Notes") issued by an indirect wholly-owned subsidiary of the Company,
Host Marriott Hospitality, Inc. ("Hospitality"). The coupon and maturity date
for each series of New Notes is 100 basis points higher and four years later,
respectively, than the series of Old Notes for which it was exchanged (except
that the maturity of the New Notes issued in exchange for the Series L Senior
Notes due 2012 was shortened by five years). The Company redeemed all of the
old Series F Senior Notes that did not tender in the Exchange Offer, and
secured the old Series I Notes equally and ratably with the New Notes issued in
the Exchange Offer. The Exchange Offer was treated as an extinguishment of debt
and, accordingly, the Company recognized an extraordinary loss of $5 million,
net of taxes of $4 million.
F-11
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the Exchange Offer, the Company effected a Restructuring
(the "Restructuring"). As a result of the Restructuring, the Company's most
significant asset is the capital stock of a wholly-owned subsidiary, HMH
Holdings, Inc. ("Holdings"). Holdings' primary asset is the capital stock of
Hospitality, and Holdings is the borrower under a line of credit (the "Line of
Credit") with Marriott International. In the Restructuring, most of the
Company's real estate and operating assets were transferred to subsidiaries of
Hospitality. Certain assets relating to such businesses (the "retained
business") were retained directly by the Company and certain of its other
subsidiaries (the "retained business subsidiaries").
The following condensed unaudited pro forma income statement data for the
Company is presented as if the Distribution, Exchange Offer and Restructuring
had occurred at the beginning of each period shown. This pro forma data has
been presented for informational purposes only. It does not purport to be
indicative of the results which may occur in the future.
<TABLE>
<CAPTION>
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Revenues.................................................... $1,354 $1,198
Operating profit before corporate expenses and interest..... $ 122 $ 138
Loss before extraordinary item and accounting changes....... $ (60) $ (37)
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
Land and land improvements................................... $ 419 $ 432
Buildings and leasehold improvements......................... 2,821 2,707
Furniture and equipment...................................... 584 585
Construction in progress..................................... 244 151
------ ------
4,068 3,875
Less accumulated depreciation and amortization............... (912) (849)
------ ------
$3,156 $3,026
====== ======
</TABLE>
Interest cost capitalized in connection with the Company's development and
construction activities totaled $10 million in 1994, $11 million in 1993, and
$14 million in 1992.
Most hotels developed by the Company since the early 1980s were reported as
assets held for sale prior to 1992. In early 1992, the Company decided it was
no longer appropriate to view sales of lodging properties, subject to operating
agreements, as a primary means of long-term financing. Accordingly, the Company
discontinued classification of these properties (with an aggregate carrying
value of approximately $1,150 million at that time) as assets held for sale.
Following discussions with the Staff of the Securities and Exchange
Commission, the Company agreed in the second quarter of 1993 to change its
method of determining net realizable value of assets reported as held for sale.
The Company previously determined net realizable value of such assets on a
property-by-property basis in the case of full-service hotels, resorts and
suites, and on an aggregate basis, by hotel brand, in the case of Courtyard
hotels, Fairfield Inns and Residence Inns. Beginning in the second fiscal
quarter of 1993 and thereafter, under the Company's new accounting policy, net
realizable value of all assets held for sale is determined on a property-by-
property basis. The after-tax cumulative effect of this change on periods
F-12
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
prior to the second quarter of 1993 of $32 million is reflected as a cumulative
effect of a change in accounting for assets held for sale in the accompanying
consolidated statement of operations for the fiscal year ended December 31,
1993. The reduction in the annual depreciation charge as a result of this
change did not have a material effect on results of operations. There was no
pro forma effect of this change on the results of operations for 1993 and 1992.
During the fourth quarter of 1993, the Company engaged in formal negotiations
to sell the majority of its Fairfield Inns and executed a letter of intent in
January 1994. In the fourth quarter of 1993, the Company considered these
hotels as held for sale and recorded a pre-tax charge to earnings of $11
million to write-down the carrying value of 15 such properties to their
individual estimated net realizable value. In the third quarter of 1994, the
Company completed the sale of 26 of its Fairfield Inns to an unrelated third
party. The net proceeds from the sale of such hotels were approximately $114
million, which exceeded the carrying value of the hotels by approximately $12
million. Approximately $27 million of the proceeds was payable in the form of a
note from the purchaser. The gain on the sale of these hotels has been
deferred.
4. INVESTMENTS IN AFFILIATES
Investments in affiliates consist of the following:
<TABLE>
<CAPTION>
OWNERSHIP
INTERESTS 1994 1993
--------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Equity investments
Hotel partnerships which own 45 Marriott Hotels,
120 Courtyard hotels, 50 Residence Inns and 50
Fairfield Inns operated by Marriott
International, Inc., as of December 30, 1994.... 1%-50% $ 29 $ 31
Receivables........................................ -- 174 189
------ ------
$203 $220
====== ======
</TABLE>
Hotel properties owned by affiliates generally were acquired from the Company
in connection with limited partnership offerings. The Company or one of its
subsidiaries typically serve as a general partner of each partnership and the
hotels are operated under long-term agreements by Marriott International.
At December 31, 1993, the Company owned a 50% interest in Times Square
Marquis Hotel, L.P. ("Times Square"), formerly Times Square Hotel Company, the
owner of the New York Marriott Marquis, and held security interests in an
additional 39% of the partnership interests as collateral for loans made to
certain partners. The partners were in default on the loans and the Company,
for accounting purposes, realized an in-substance foreclosure of their
partnership interests. In the first quarter of 1994, the Company foreclosed on
a 29% partnership interest and completed the transfer of an additional 7%
partnership interest in Times Square in full satisfaction of the loans. As a
result, the Company holds an 86% partnership interest in Times Square at
December 30, 1994. In 1993, the Company began reporting substantially all the
losses of Times Square and on December 31, 1993 began consolidating Times
Square. The Company's December 31, 1993 balance sheet was impacted by an
increase in debt and other long-term liabilities of approximately $451 million,
and a corresponding increase in assets (principally property and equipment).
In December 1993, the Company sold its 15% interest in the partnership owning
the Boston Copley Marriott Hotel for $10.4 million.
F-13
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1993, the Company sold portions of its equity interests in Residence Inns
USA partnership for $31 million. These sales reduced the Company's ownership by
the fourth quarter of 1993 to 16.6% and allowed the Company to be released from
certain debt guarantee obligations. Accordingly, the Company deconsolidated the
partnership and removed $64 million of debt and $96 million of property and
equipment from its consolidated balance sheet at December 31, 1993. In 1994,
the Company sold an additional portion of its equity interests in the
partnership for $7 million. A gain on the sale transactions totalling $14
million has been deferred and is being amortized through 1996.
In the fourth quarter of 1993, a Company-owned addition to a hotel owned by a
partnership in which the Company is a general partner was taken through
foreclosure by the hotel's lender. The Company's investment in the addition was
written off at that time.
Receivables from affiliates are reported net of reserves of $200 million at
December 30, 1994 and $196 million at December 31, 1993. Receivables from
affiliates at December 30, 1994 included a $150 million mortgage note at 9%
which amortizes through 2003, and net debt service and other advances totalling
$14 million which are generally secured by subordinated liens on the
properties. The Company has committed to advance additional amounts to
affiliates, if necessary, to cover certain debt service requirements. Such
commitments are limited, in the aggregate, to an additional $236 million at
December 30, 1994. Net amounts funded under these commitments totalled $2
million in 1994 and $14 million in 1993.
The Company's pre-tax income from affiliates includes the following:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Management fees, net of direct costs........................ $-- $ 67 $ 82
Ground rental income........................................ -- 14 19
Interest income............................................. 17 16 16
Equity in net income (losses)............................... -- (27) (24)
---- ---- ----
$ 17 $ 70 $ 93
==== ==== ====
</TABLE>
Combined summarized balance sheet information for the Company's affiliates
follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
Property and equipment....................................... $3,358 $3,446
Other assets................................................. 346 369
------ ------
Total assets............................................... $3,704 $3,815
====== ======
Debt, principally mortgages.................................. $3,658 $3,736
Other liabilities............................................ 839 856
Partners' deficit............................................ (793) (777)
------ ------
Total liabilities and partners' deficit.................... $3,704 $3,815
====== ======
</TABLE>
F-14
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Combined summarized operating results reported by these affiliates follow:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues............................................... $ 705 $ 731 $ 704
Operating expenses:
Cash charges (including interest).................... (491) (511) (548)
Depreciation and other non-cash charges.............. (296) (299) (335)
----- ----- -----
Loss before extraordinary item..................... (82) (79) (179)
Extraordinary item--forgiveness of debt............ 113 -- --
----- ----- -----
Net income (loss).................................. $ 31 $ (79) $(179)
===== ===== =====
</TABLE>
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
1994 1993
---- ----
(IN
MILLIONS)
<S> <C> <C>
Other Assets
Escrow deposits................................................. $ 62 $117
Deferred financing fees......................................... 38 42
Intangible assets............................................... 22 25
Other........................................................... 54 72
---- ----
$176 $256
==== ====
Other Liabilities
Deferred ground rent............................................ $ 59 $ 49
Casualty insurance.............................................. 42 49
Deferred income................................................. 20 20
Other........................................................... 71 90
---- ----
$192 $208
==== ====
</TABLE>
6. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), during the first quarter of 1993.
Prior to such adoption, the Company deferred the past tax effects of timing
differences between amounts recorded for financial reporting purposes and
taxable income. SFAS 109 requires the recognition of deferred tax assets and
liabilities equal to the expected future tax consequences of temporary
differences.
The $30 million cumulative credit resulting from this change in accounting
principle has been reflected as a cumulative effect of a change in accounting
for income taxes in the consolidated statements of operations for 1993.
F-15
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total deferred tax assets and liabilities at December 30, 1994 and December
31, 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS)
<S> <C> <C>
Gross deferred tax assets...................................... $ 222 $ 257
Less: Valuation allowance (22) (22)
----- -----
Net deferred tax assets........................................ 200 235
Gross deferred tax liabilities................................. (653) (677)
----- -----
Net deferred income tax liability.............................. $(453) $(442)
===== =====
</TABLE>
The valuation allowance required under SFAS 109 primarily represents prior
purchase business combination tax credits of $17 million and net operating loss
carryforwards (NOLs) of $4 million, the benefits of which were not previously
recorded, but which have been recorded under SFAS 109 as deferred tax assets
with an offsetting valuation allowance. Any subsequent reduction in the
valuation allowance related to the prior purchase business combination tax
credits and NOLs will be recorded as a reduction of income tax expense. There
was no change in the valuation allowance during 1994 and 1993.
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as
of December 30, 1994 and December 31, 1993 follows:
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS)
<S> <C> <C>
Investments in affiliates...................................... $(308) $(279)
Property and equipment......................................... (172) (199)
Safe harbor lease investments.................................. (104) (109)
Deferred tax gain.............................................. (69) (90)
Reserves....................................................... 116 150
Tax credit carryforwards....................................... 46 50
Other, net..................................................... 38 35
----- -----
Net deferred income tax liability.............................. $(453) $(442)
===== =====
</TABLE>
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<C> <S> <C> <C> <C>
Current -- Federal...................................... $ (6) $ 57 $39
-- State........................................ 5 30 3
-- Foreign...................................... -- 11 20
---- ---- ---
(1) 98 62
---- ---- ---
Deferred -- Federal...................................... (3) (16) (6)
-- State........................................ -- (10) 10
-- Foreign...................................... -- -- (1)
---- ---- ---
(3) (26) 3
---- ---- ---
$ (4) $ 72 $65
==== ==== ===
</TABLE>
F-16
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to 1993, deferred income taxes resulted from timing differences in the
recognition of income and expenses for financial and tax reporting purposes.
Tax effects of these differences for 1992, as reported under the Company's
previous method of accounting for income taxes, consist of the following at
January 1, 1993 (in millions):
<TABLE>
<S> <C>
Depreciation........................................................ $(15)
Capitalized interest................................................ 2
Partnership interests............................................... 41
Purchased tax lease benefits........................................ (4)
Asset dispositions.................................................. (31)
Capitalized operations.............................................. --
Casualty claims..................................................... (17)
Employee benefit plans.............................................. (2)
Restructuring costs................................................. 1
Other, net.......................................................... 28
----
$ 3
====
</TABLE>
At December 30, 1994, the Company has net operating loss carryforwards of $12
million which expire through 2001. Additionally, the Company has approximately
$41 million of alternative minimum tax credit carryforwards which do not
expire, and $5 million of other tax credits which expire through 2009.
A reconciliation of the statutory Federal tax rate to the Company's effective
income tax rate follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ---- ----
<S> <C> <C> <C>
Statutory Federal tax rate............................... (35.0%) 35.0% 34.0%
State income taxes, net of Federal tax benefit........... 15.2 10.1 6.4
Tax credits.............................................. (3.6) (2.9) (2.3)
Additional tax on foreign source income.................. 1.0 3.2 --
Enacted tax rate increase................................ -- 5.1 --
Other, net............................................... 5.0 5.5 5.2
----- ---- ----
Effective income tax rate.............................. (17.4%) 56.0% 43.3%
===== ==== ====
</TABLE>
As part of the Distribution, the Company and Marriott International entered
into a tax sharing agreement which reflects each party's rights and obligations
with respect to deficiencies and refunds, if any, of Federal, state or other
taxes relating to the businesses of the Company and Marriott International
prior to the Distribution. The majority of the 1994 adjustment to the
Distribution of stock of Marriott International related to deferred income
taxes.
Cash paid for income taxes, net of refunds received, was $14 million in 1994,
$64 million in 1993, and $93 million in 1992.
F-17
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASES
Future minimum annual rental commitments for all non-cancelable leases are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------- ---------
(IN MILLIONS)
<S> <C> <C>
1995....................................................... $ 2 $ 120
1996....................................................... 2 115
1997....................................................... 2 105
1998....................................................... 2 106
1999....................................................... 1 99
Thereafter................................................. 10 648
--- ------
Total minimum lease payments............................... 19 $1,193
======
Less amount representing interest.......................... (8)
---
Present value of minimum lease payments.................... $11
===
</TABLE>
The Company leases certain property and equipment under non-cancelable
operating leases. Leases related to the Company's Real Estate Group include
long-term ground leases for certain hotels, generally with multiple renewal
options. Leases related to the Company's Operating Group generally do not have
renewal or extension provisions. Certain leases contain provisions for the
payment of contingent rentals based on a percentage of sales in excess of
stipulated amounts. Certain leases also contain contractual rental payment
increases throughout the term of the lease. The minimum rent increases are
amortized over the term of the applicable lease on a straight-line basis.
Certain of the leases included above relate to facilities used in the former
restaurant business. Most leases contain one or more renewal options, generally
for five or 10-year periods. Future rentals on leases have not been reduced by
aggregate minimum sublease rentals of $149 million payable to the Company under
non-cancelable subleases.
The Company remains contingently liable at December 30, 1994 on certain
leases relating to divested properties. Such contingent liabilities aggregated
$156 million at December 30, 1994. However, management considers the likelihood
of any substantial funding related to these leases to be remote.
Rent expense consists of:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rentals on operating leases.......................... $128 $199 $195
Additional rentals based on sales............................ 94 87 88
Payments to owners of managed and leased hotels based primar-
ily on profits.............................................. -- 476 607
---- ---- ----
$222 $762 $890
==== ==== ====
</TABLE>
F-18
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
New Senior Notes (New Notes), with an average rate of 10.4% at
December 30, 1994, maturing through 2011..................... $ 929 $1,234
Old Senior Notes (Old Notes), with an average rate of 9.0% at
December 30, 1994, maturing through 2012..................... 135 143
Notes secured by $1,086 million of real estate assets, with an
average rate of 8.6% at December 30, 1994, maturing through
2012......................................................... 758 799
Line of Credit, with a variable rate of LIBOR plus 4% (10.125%
at December 30, 1994), due 2008.............................. 163 193
Acquisition Revolver, secured by $358 million of real estate
assets, variable rate of LIBOR plus 1.75% (7.8125% at
December 30, 1994), due 2001................................. 168 --
Other notes, with an average rate of 5.6% at December 30,
1994, maturing through 2017.................................. 95 97
Capital lease obligations..................................... 11 13
------ ------
$2,259 $2,479
====== ======
</TABLE>
In connection with the Distribution, the Company entered into the Line of
Credit with Marriott International. Pursuant to the Line of Credit, Holdings
may borrow up to $630 million for certain permitted uses from Marriott
International through 2007, with all unpaid advances due August 31, 2008.
Borrowings under the Line of Credit bear interest at LIBOR plus 4%, with any
interest in excess of 10.5% per annum deferred. An annual fee of one percent is
charged on the unused portion of the commitment. The Line of Credit is
guaranteed by the Company and certain subsidiaries.
The Line of Credit imposes certain restrictions on the ability of the Company
and certain of its subsidiaries to incur additional debt, impose liens or
mortgages on their properties (other than various types of liens arising in the
ordinary course of business), extend new guarantees (other than replacement
guarantees), pay dividends, repurchase their common stock, make investments and
incur capital expenditures.
Hospitality is the issuer of the New Notes, which are secured by a pledge of
the stock of, and guaranteed by, Holdings, Hospitality and certain of its
subsidiaries. The indenture governing these notes contains covenants that,
among other things, limit the ability of Hospitality to pay dividends and make
other distributions and restricted payments, to incur additional debt, create
additional liens on their respective assets, engage in certain transactions
with related parties, enter into agreements which restrict a subsidiary in
paying dividends or making certain other payments and limit the activities and
businesses of Holdings. The net assets of Hospitality at December 30, 1994 were
approximately $650 million, substantially all of which are restricted.
Under the terms of the New Notes indenture, Hospitality is obligated to use
50% to 75% of the net proceeds from the sale of certain assets to prepay New
Notes on a pro-rata basis. The Company redeemed approximately $292 million of
New Notes in 1994. In connection with the 1994 redemptions, the Company
recognized an extraordinary loss of $6 million, net-of-taxes of $3 million.
Additionally, under certain circumstances and subject to certain limitations,
the Company is required to redeem the New Notes with certain proceeds from
refinancing and the sale of equity interests by Hospitality or its
subsidiaries. The New Notes are not otherwise subject to redemption prior to
maturity.
F-19
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has available up to $125 million of first mortgage financing from
Marriott International for approximately 60% of the construction and
development costs of the Philadelphia Marriott Hotel. As of December 30, 1994,
the outstanding loan balance was $88 million. The loan bears interest at LIBOR
plus 3% (9.0625% at December 30, 1994) for the period ending two years after
construction. For the following 10 years, the loan bears interest at 10% per
annum with an additional 2% per annum deferred.
During 1993, the Company defeased $100 million of Old Series G Senior Notes
due in February 1994 for an amount substantially equal to its net carrying
value.
In November 1994, the Company, through its wholly-owned subsidiary, HMC
Acquisition Properties, obtained a $230 million secured, seven-year revolving
and term loan facility (the "Revolver") for funding future acquisitions of
full-service hotels and required improvements thereon. The Revolver bears
interest based on LIBOR plus 1.75% and/or the prime rate plus .75%. In November
1996, the Revolver converts to a five-year amortizing loan maturing in November
2001. An annual fee of .5% is charged on the unused portion of the commitment.
The Revolver is secured by substantially all of the assets of HMC Acquisition
Properties and its subsidiaries and is guaranteed by the Company.
In August 1994, the Times Square first mortgage loan was extended for five
years from its original maturity of December 1993. In connection with the
extension, $39 million of principal payments were made on the loan. The
principal balance of the loan of $328 million is scheduled to mature as
follows: $5 million in each of 1995 through 1997, and $313 million in 1998.
Interest on $165 million of the loan is fixed at approximately 8.4% and
interest on the remaining portion of the loan is based on LIBOR plus 1.5%.
Annual minimum principal amortization of $5 million a year is required and all
additional cash flow will be applied as additional amortization until the
principal amount of the loan is paid down to $300 million. Once the principal
amount of the loan is paid down to $300 million, 75% of future cash flow in
excess of minimum amortization requirements ranging up to $9 million per year
will be applied to further principal amortization and the remaining 25% will be
available for other obligations of Times Square, including loans due to the
Company. The Company provides a $10 million debt service guarantee of principal
and interest on the loan.
At December 30, 1994, the Company was party to $500 million aggregate
notional amount of interest rate exchange agreements with two financial
institutions and one investment bank (the contracting parties). Under these
agreements, the Company collects interest at fixed rates (average rate of 7.6%
at December 30, 1994) and pays interest based on specified floating interest
rates (average rate of 6.7% at December 30, 1994) through 1997. The Company
monitors the credit worthiness of its contracting parties by evaluating credit
exposure and referring to the ratings of widely accepted credit rating
services. The Standard and Poors' long-term debt ratings for the contracting
parties are all BBB+ or better. The Company is exposed to credit loss in the
event of non-performance by the contracting parties to the interest rate swap
agreements; however, the Company does not anticipate non-performance by the
contracting parties.
F-20
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate debt maturities at December 30, 1994, excluding capital lease
obligations, are:
<TABLE>
<CAPTION>
NOT
CARRYING CARRYING
COMPANY COMPANY
GUARANTEE GUARANTEE
--------- ---------
(IN MILLIONS)
<S> <C> <C>
1995..................................................... $ 93 $ 6
1996..................................................... 70 50
1997..................................................... 50 6
1998..................................................... 20 314
1999..................................................... 45 2
Thereafter............................................... 1,217 375
------ ----
$1,495 $753
====== ====
</TABLE>
Debt not carrying a Company guarantee includes debt with partial recourse
where the Company's exposure is limited to $22 million.
Cash paid for interest, net of amounts capitalized, was $198 million in 1994,
$214 million in 1993, and $209 million in 1992. Deferred financing costs, which
are included in other assets, amounted to $38 million and $42 million at
December 30, 1994 and December 31, 1993, respectively.
9. CONVERTIBLE SUBORDINATED DEBT
In June 1991, the Company issued $675 million (principal amount at maturity)
of zero coupon convertible subordinated debt in the form of Liquid Yield Option
Notes (LYONs) due 2006. Pursuant to the Distribution, Marriott International
assumed 90% and the Company retained 10% of the debt obligations evidenced by
the LYONs. The LYONs were convertible into 13.277 shares each of the Company's
and Marriott International's common stock for each $1,000 principal amount of
LYONs. On December 13, 1993, the Company initiated a call of the LYONs
redeemable on January 25, 1994. Substantially all of the LYONs' holders elected
to convert their LYONs into common stock prior to the redemption. Such
conversions represented 8.3 million shares of the Company's common stock issued
in 1993 and .7 million shares issued in 1994.
10. SHAREHOLDERS' EQUITY
Three hundred million shares of common stock, with a par value of $1 per
share, are authorized, of which 153.6 million and 129.7 million were issued and
outstanding as of December 30, 1994 and December 31, 1993, respectively. One
million shares of preferred stock, without par value, are authorized, of which
258 shares (equivalent to 258,000 depositary shares) of 8.25% Series A
cumulative convertible preferred stock ("Series A Preferred") were issued and
outstanding as of December 30, 1994. Additional paid-in capital at December 30,
1994 includes deferred compensation credits of $15 million.
On January 27, 1994, the Company completed the issuance of 20.1 million
shares of common stock for net proceeds of $230 million. In connection with the
class action settlement discussed in Note 17, the Company issued warrants to
purchase up to 7.7 million shares of the Company's common stock in 1994.
Each Series A Preferred depositary share was convertible at any time at the
option of the holder into approximately 2.87 shares of common stock. In
September 1993, approximately 92%, or 3.7 million depositary shares, were
converted into 10.6 million shares of Company common stock. From the
Distribution
F-21
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
through February 24, 1995, an additional 5% converted. On September 30, 1993,
the Company's Board of Directors adjusted the conversion rate of the Company's
remaining depositary shares to 19.16 shares of common stock per depository
share to reflect the Distribution. Dividends, if declared, are payable
quarterly. The Company has not paid six quarterly dividend payments since the
Distribution, and, accordingly, the remaining holders of the Series A Preferred
stock would be entitled to elect two directors of the Company. Beginning on
January 15, 1996, the Series A Preferred stock is redeemable, in whole or in
part, at the Company's option, at $52.48 per depositary share, declining
ratably to $50 per depositary share in 2002, plus accrued and unpaid dividends
to the redemption date.
In February 1989, the Board of Directors adopted a shareholder rights plan
under which a dividend of one preferred stock purchase right was distributed
for each outstanding share of the Company's common stock to shareholders of
record on February 20, 1989. Each right entitles the holder to buy 1/1,000th of
a share of a newly issued series of junior participating preferred stock of the
Company at an exercise price of $150 per share. The rights will be exercisable
10 days after a person or group acquires beneficial ownership of 20% or more of
the Company's common stock, or begins a tender or Exchange Offer for 30% or
more of the Company's common stock. Shares owned by a person or group on
February 3, 1989 and held continuously thereafter are exempt for purposes of
determining beneficial ownership under the rights plan. The rights are
nonvoting and will expire on February 2, 1999, unless exercised or previously
redeemed by the Company for $.01 each. If the Company is involved in a merger
or certain other business combinations not approved by the Board of Directors,
each right entitles its holder, other than the acquiring person or group, to
purchase common stock of either the Company or the acquirer having a value of
twice the exercise price of the right.
11. EMPLOYEE STOCK PLANS
Total shares of common stock reserved and available under employee stock
plans at December 30, 1994 are:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Comprehensive plan........................................... 22.7
Employee stock purchase plan................................. 3.5
----
26.2
====
</TABLE>
Under the comprehensive stock plan (the "comprehensive plan"), the Company
may award to participating employees (i) options to purchase the Company's
common stock, (ii) deferred shares of the Company's common stock and (iii)
restricted shares of the Company's common stock. In addition, the Company has
an employee stock purchase plan (the "stock purchase plan"). The principal
terms and conditions of the two plans are summarized below.
F-22
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Employee stock options may be granted to officers and key employees at not
less than fair market value on the date of grant. Options granted before May
11, 1990 expire 10 years after the date of grant and nonqualified options
granted on or after May 11, 1990 expire up to 15 years after the date of grant.
Most options vest ratably over each of the first four years. In connection with
the Distribution, the Company issued an equivalent number of Marriott
International options and adjusted the exercise prices of its options then
outstanding based on the relative trading prices of shares of the common stock
of the two companies. Therefore, the options outstanding at December 30, 1994
and December 31, 1993 reflect these revised exercise prices. Option activity is
summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
------------- ------------
(IN MILLIONS)
<S> <C> <C>
Balance at January 3, 1992........................ 14.5 $ 7-39
Granted........................................... 3.2 15-19
Exercised......................................... (.8) 7-18
Cancelled......................................... (1.2) 8-37
----
Balance at January 1, 1993........................ 15.7 8-39
Granted........................................... 1.2 8-26
Exercised......................................... (2.3) 2-29
Cancelled......................................... (1.0) 2-39
----
Balance at December 31, 1993...................... 13.6 2- 8
Granted........................................... .6 10
Exercised......................................... (2.2) 2- 8
Cancelled......................................... (.3) 2- 8
----
Balance at December 30, 1994...................... 11.7 2-10
====
Exercisable at December 30, 1994.................. 8.1
====
</TABLE>
Deferred stock incentive plan shares granted to officers and key employees
after 1990 generally vest over 10 years in annual installments commencing one
year after the date of grant. Certain employees may elect to defer payments
until termination or retirement. Deferred stock incentive plan shares granted
in 1990 and prior years generally vest in annual installments commencing one
year after the date of grant and continuing until retirement. Employees also
could elect to forfeit one-fourth of their deferred stock incentive plan award
in exchange for accelerated vesting over a 10-year period. The Company accrues
compensation expense for the fair market value of the shares on the date of
grant, less estimated forfeitures. In 1994, 1993 and 1992, 159,000, 489,000,
and 671,000 shares were granted, respectively, under this plan.
In 1993, restricted stock plan shares under the comprehensive plan were
issued to officers and key executives and will be distributed over the next
three to ten years in annual installments based on continued employment and the
attainment of certain performance criteria. The Company recognizes compensation
expense over the restriction period equal to the fair market value of the
shares on the date of issuance adjusted for forfeitures, and where appropriate,
the level of attainment of performance criteria and fluctuations in the fair
market value of the stock. Prior to 1993, restricted stock shares were issued
to officers and key employees and are distributed over 10 years in annual
installments, subject to certain prescribed conditions including continued
employment. The Company recognizes compensation expense on these pre-1993
awards over the restriction period equal to the fair market value of the shares
on the date of issuance. The Company issued 3,537,000, and 32,000 shares under
these plans in 1993 and 1992, respectively. The Company recorded compensation
expense of $6 million and $400,000 in 1994 and 1993, respectively, related to
these awards.
F-23
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the stock purchase plan, eligible employees may purchase
common stock through payroll deductions at the lower of market value at the
beginning or end of the plan year.
12. PROFIT SHARING AND POSTEMPLOYMENT BENEFIT PLANS
The Company contributes to profit sharing and other defined contribution
plans for the benefit of employees meeting certain eligibility requirements and
electing participation in the plans. The amount to be matched by the Company is
determined annually by the Board of Directors, and totalled $2 million for
1994, $20 million for 1993, and $25 million for 1992.
The Company provides medical benefits to a limited number of retired
employees meeting restrictive eligibility requirements. The Company adopted
Statement of Financial Accounting Standards (SFAS) No. 112, "Employers'
Accounting for Postemployment Benefits" during 1994. Adoption of SFAS 112 did
not have a material effect on the accompanying financial statements.
13. OPERATING GROUP RESTRUCTURING
In November 1993, the Company's Operating Group announced a plan to redesign
its operations structure to improve the effectiveness and competitiveness of
the business. Implementation of the new structure was completed in the first
quarter of 1994. The Company incurred costs of approximately $7 million,
principally for severance, relocation, and the write-off of development costs
for a data processing system no longer required under the new organizational
structure, which was accrued as a restructuring charge in the fourth quarter of
1993.
14. ACQUISITIONS AND DISPOSITIONS
In 1994, the Company acquired 15 full-service hotels totalling approximately
6,000 rooms in several transactions for approximately $443 million. The Company
also provided 100% financing totalling approximately $35 million to an
affiliated partnership, in which the Company owns the sole general partner
interest, for the acquisition of two full-service hotels (totalling another 684
rooms). Additionally, the Company acquired a controlling interest in one 662-
room, full-service hotel through an equity investment of $16 million and debt
financing of $36 million (the debt was subsequently sold in 1995). The Company
accounts for all 18 of these properties as owned hotels for accounting
purposes. The Company's summarized, consolidated pro forma results of
operations, assuming the hotel additions occurred on January 2, 1993, are as
follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
1994 1993
------ ------
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $1,560 $1,835
Net income (loss) available for common stock................ (13) 63
Income (loss) per common share.............................. (.09) .45
</TABLE>
During 1994, the Company sold its 14 senior living communities to an
unrelated party for $320 million, which approximated the communities' carrying
value. See Note 3 for a discussion of the 1994 sale of 26 Fairfield Inns.
During the fourth quarter of 1993, the Company realized proceeds of
approximately $42 million on the disposition of two preferred stock
investments.
F-24
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1992, the Company sold 13 Courtyard hotels for $146 million in a
sale/leaseback transaction. The Company also sold seven full-service hotels in
1992, for total proceeds of $200 million. Pre-tax gains on these full-service
hotel sales of approximately $15 million were offset by adjustments to
previously established reserves, resulting in no net gain or loss.
In 1992, the Company sold with recourse certain timeshare notes receivable
taken by its vacation resorts division in connection with the sale of
timesharing units. Net proceeds from these transactions totaled $34 million in
1992.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of certain financial assets and liabilities and other
financial instruments are shown below.
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1994 1993
--------------- ---------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial assets
Receivables from affiliates.................. $ 174 $ 172 $ 189 $ 187
Notes receivable and other................... 50 109 150 232
Financial liabilities
Debt......................................... 2,248 2,198 2,466 2,470
Other financial instruments
Affiliate debt service commitments........... -- -- -- 5
Interest rate swap agreements................ -- 12 -- 33
</TABLE>
Receivables from affiliates, notes and other financial assets are valued
based on the expected future cash flows discounted at risk-adjusted rates.
Valuations for secured debt are determined based on the expected future
payments discounted at risk-adjusted rates. The fair values of the Line of
Credit, the Revolver, and other notes are estimated to be equal to their
carrying value. Senior Notes are valued based on quoted market prices.
The Company is contingently liable under various guarantees of obligations of
certain affiliates (affiliate debt service commitments) with a maximum
commitment of $236 million at December 30, 1994 and $271 million at December
31, 1993. A fair value is assigned to commitments with expected future
fundings. The fair value of the commitments represents the net expected future
payments discounted at risk-adjusted rates. Such payments are accrued on an
undiscounted basis.
The fair value of interest rate swap agreements is based on the estimated
amount the Company would receive to terminate the swap agreements. The
aggregate notional amount of the agreements was $500 million at December 30,
1994 and December 31, 1993.
16. RELATIONSHIP WITH MARRIOTT INTERNATIONAL
In connection with the Distribution, the Company and Marriott International
entered into agreements which provide, among other things, that (i) lodging
properties owned by the Company as of the Distribution Date will be managed by
Marriott International under agreements with initial terms of 20 years and
which are subject to renewal at the option of Marriott International for up to
three additional 10-year terms; (ii) the Company will lease its owned senior
living communities to Marriott International prior to their disposal (see Note
14); (iii) Marriott International guarantees the Company's performance in
connection with certain loans
F-25
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and other obligations; (iv) the Company can borrow up to $630 million for
certain permitted uses under the Line of Credit and up to $125 million of first
mortgage financing for construction of the Philadelphia Marriott Hotel (see
Note 8); and (v) Marriott International assumed 90% of the LYONs obligation
(see Note 9). Additionally, 15 management agreements with Marriott
International were added or extended in 1994 as a result of the 1994 hotel
acquisitions.
The management agreements generally provide for base management or system
fees of three or four percent of gross revenues, a formula based incentive
management fee limited to 20 percent of cumulative hotel operating profit, as
defined, and reimbursement for certain system-wide operating costs. The Company
has the option to terminate certain management agreements if specified
performance thresholds are not satisfied.
In 1994 and from the Distribution Date through December 31, 1993, the Company
paid to Marriott International $41 million and $5 million, respectively, in
lodging management fees, $23 million and $5 million in interest and commitment
fees under the Revolving Line of Credit and Philadelphia Marriott Hotel
mortgage, and $11 million and $3 million under the various transitional service
agreements, and earned $14 million and $5 million under the senior living
community leases during 1994 and 1993. The Company purchased $65 million and
$14 million, respectively, of food and supplies in 1994 and 1993 (after the
Distribution Date) from affiliates of Marriott International.
Additionally, Marriott International has the right to purchase up to 20% of
the voting stock of the Company if certain events involving a change in control
of the Company occur. Marriott International also has the right of first offer
if the Company decides to sell the Operating Group.
17. LITIGATION
In March 1993, the Company reached agreement in principle (the "Class Action
Settlement") with certain holders and recent purchasers of the Company's Old
Notes, who had either instituted or threatened litigation in response to the
Distribution. In August 1993, the United States District Court approved the
Class Action Settlement. In connection with this settlement, the Company issued
warrants in 1994 to purchase up to 7.7 million shares of Host Marriott common
stock. Such warrants are exercisable for five years from the Distribution Date,
at $8.00 per share during the first three years and $10.00 per share during the
last two years.
A group of bondholders (the "PPM Group"), purported to have at one time owned
approximately $120 million of Senior Notes, and another group purporting to
hold approximately $7.5 million of Senior Notes, opted out of the Class Action
Settlement. The PPM Group alleges that laws had been violated in connection
with the sale by the Company of certain series of its Senior Notes and
debentures and claimed damages of approximately $30 million. The group
purporting to hold $7.5 million of Senior Notes settled with the Company in
April 1994. Under the terms of the settlement, the Company repurchased the
Senior Notes at their par value in the second quarter of 1994.
In September 1994, the Company settled with certain members of the PPM Group
whose claims represented about 40% of the PPM Group's aggregate claims. The
claims of the remainder of the PPM Group went to trial in September 1994, and
in October 1994, the judge declared a mistrial based on the inability of the
jury to reach a verdict. In January 1995, the judge granted the Company's
motion for summary judgment to dismiss the PPM Group's claims as a matter of
law. An appeal was filed by the PPM Group in February 1995.
F-26
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company believes that all claims of the PPM Group are without merit and
that the appeal will not be successful.
18. BUSINESS SEGMENTS
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Identifiable assets
Real Estate Group.................................... $3,163 $3,117 $3,925
Operating Group...................................... 455 476 1,497
Other................................................ 204 255 880
------ ------ ------
3,822 3,848 6,302
Discontinued operations.............................. -- -- 44
------ ------ ------
$3,822 $3,848 $6,346
====== ====== ======
Capital expenditures
Real Estate Group.................................... $ 155 $ 158 $ 125
Operating Group...................................... 40 70 79
Other................................................ 3 7 4
------ ------ ------
198 235 208
Discontinued operations.............................. -- -- 2
------ ------ ------
$ 198 $ 235 $ 210
====== ====== ======
Depreciation and amortization
Real Estate Group.................................... $ 113 $ 130 $ 148
Operating Group...................................... 60 119 122
Other................................................ 1 16 14
------ ------ ------
$ 174 $ 265 $ 284
====== ====== ======
</TABLE>
The Real Estate Group is, subsequent to the Distribution, comprised of the
Company's owned full-service hotels, resorts and suites, Courtyard hotels,
Residence Inns and Fairfield Inns, and senior living communities through their
disposition in 1994. Prior to the Distribution, this segment also included the
lodging management and vacation ownership resort operations which were
distributed to Marriott International.
The Operating Group segment now consists of food, beverage and merchandise
operations at airports, on tollroads and at stadiums, arenas and other
attractions. The business units providing food and facilities management
services, operation of senior living communities, and distribution services of
food and related products were also distributed to Marriott International.
The results of operations of the Company's business segments are reported in
the consolidated statement of operations. Segment operating expenses include
selling, general and administrative expenses directly related to the operations
of the businesses, aggregating $54 million in 1994, $61 million in 1993
(excluding $316 million related to Marriott International) and $457 million in
1992. Gains and losses resulting from the disposition of assets identified with
each segment are included in segment operating profit.
Current assets and current liabilities of the Operating Group approximated
$100 million each at December 30, 1994 and December 31, 1993, respectively.
F-27
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As discussed in Note 1, subsequent to the Distribution, revenues for the Real
Estate Group include house profit from the Company's owned hotel properties.
Accordingly, the following table presents the details of hotel revenues for
1994 and 1993, and revenues and expenses for 1992.
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Rooms................................................ $ 668 $ 524 $2,843
Food and Beverage.................................... 250 162 1,190
Other................................................ 56 39 518
----- ----- ------
Total Hotel Revenues............................... 974 725 $4,551
----- ----- ======
Department Costs
Rooms................................................ 170 130 $ 676
Food and Beverage.................................... 195 130 917
Other................................................ 29 19 2,625
----- ----- ------
Total Department Costs............................. 394 279 $4,218
----- ----- ======
Department Profit...................................... 580 446
Other Deductions....................................... (240) (195)
----- -----
House Profit........................................... $ 340 251
=====
Revenues from Owned Hotels in excess of House Profit
prior to Distribution................................. 355
-----
Revenue per Statement of Operations.................... $ 606
=====
</TABLE>
19. QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1994
--------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------
(UNAUDITED, IN MILLIONS, EXCEPT PER
COMMON SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues............................... $301 $359 $387 $454 $1,501
Operating profit before corporate ex-
penses and interest................... 24 53 61 53 191
Income (loss) before extraordinary
item.................................. (18) -- 11 (12) (19)
Net income (loss)...................... (18) -- 8 (15) (25)
Net income (loss) available for common
stock................................. (18) -- 8 (15) (25)
Income (loss) per common share:
Income (loss) before extraordinary
item................................. (.12) -- .07 (.08) (.13)
Net income (loss)..................... (.12) -- .05 (.10) (.17)
</TABLE>
F-28
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1993
--------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Revenues............................... $386 $439 $491 $437 $1,753
Operating profit before profit of dis-
tributed operations, corporate ex-
penses, and interest.................. 19 47 56 12 134
Income (loss) before extraordinary item
and cumulative effect of accounting
changes............................... 19 36 27 (25) 57
Net income (loss)...................... 17 36 27 (30) 50
Dividends on preferred stock........... (4) (4) -- -- (8)
Net income (loss) available for common
stock................................. 13 32 27 (30) 42
Income (loss) per common share:
Income (loss) before extraordinary
item and cumulative effect of ac-
counting changes.................... .14 .29 .25 (.21) .40
Net income (loss).................... .12 .29 .25 (.25) .35
</TABLE>
The first three quarters consist of 12 weeks each, and the fourth quarter
includes 16 weeks.
Third and fourth quarter 1994 results include extraordinary after-tax losses
of $3 million, respectively, on the extinguishment of debt. In the second
quarter of 1994, the Company recorded $12 million of termination expenses for
the transfer of the Company's rights under an unprofitable concessions contract
to a third party, which was partially offset by an $8 million reduction in
general liability and workers' compensation insurance reserves due to favorable
claims experience.
Fourth quarter 1993 results include pre-tax costs of $13 million related to
the Distribution (see Note 2). Also, fourth quarter 1993 results include a
charge of $11 million related to a write-down of lodging properties (see Note
3), a charge of $7 millon related to the Operating Group Restructuring (see
Note 13) and the extraordinary after-tax loss of $5 million on the
extinguishment of debt (see Note 2). As a result of the Distribution, Marriott
International's operations have been substantially eliminated from the fourth
quarter 1993 data.
The sum of the earnings (loss) per common share for the four quarters in 1993
differs from the annual earnings per common share due to the required method of
computing the weighted average number of shares in the respective periods.
The first and second quarter 1993 income and per share data have been
restated to reflect the cumulative effect of the change in accounting for
assets held for sale as if it had occurred in the first quarter of 1993 (see
Note 3). First quarter 1993 earnings per common share was also impacted by the
Company's accounting change for income taxes (see Note 6).
20. SUBSEQUENT EVENT (UNAUDITED)
In March 1995, the Company entered into a sale/leaseback agreement with a
real estate investment trust for 21 of the Company's Courtyard properties for
$179 million (10% of which is deferred), with the purchaser having the option
to buy and lease back up to 33 of the remaining Courtyard properties within one
year.
F-29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF
THE SECURITIES COVERED BY THIS PROSPECTUS TO ANY PERSON OR BY ANY PERSON IN ANY
JURISDICTION WHERE IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
The Company............................................................... 10
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 11
Capitalization of the Company............................................. 12
Pro Forma Condensed Consolidated Financial Data........................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Selected Historical Financial Data........................................ 28
Business and Properties................................................... 30
Legal Proceedings......................................................... 38
The Distribution.......................................................... 38
The Exchange Offer and Restructuring...................................... 38
Financing................................................................. 39
Relationship Between the Company and Marriott International............... 42
Management................................................................ 49
Certain Transactions...................................................... 55
Ownership of Company Securities........................................... 56
Description of the Warrants............................................... 59
Description of Capital Stock.............................................. 61
Certain Federal Income Tax Correspondence................................. 65
Price Range of the Common Stock and Dividends............................. 68
Plan of Distribution...................................................... 69
Purposes and Antitakeover Effects of Certain Provisions of the Company
Certificate and Bylaws and the Marriott International Purchase Right..... 70
Legal Matters............................................................. 75
Experts................................................................... 75
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,700,000 WARRANTS
TO PURCHASE COMMON STOCK
7,700,000 SHARES
OF COMMON STOCK
HOST MARRIOTT
CORPORATION
-----------------
PROSPECTUS
APRIL , 1995
-----------------
APRIL , 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of all expenses in connection with the
issuance and distribution of the securities registered hereby. Except for the
SEC registration fee, all amounts provided are estimated.
<TABLE>
<S> <C>
Registration Fee................................................ $ 26,552
Blue Sky Fees and Expenses...................................... 7,000
Stock Exchange Fees............................................. 1,500
Legal Fees...................................................... 110,000
Accounting Fees................................................. 60,000
Printing........................................................ 90,000
--------
$295,052
</TABLE>
--------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article Eleventh and Article Sixteenth of the Company's Certificate and
Section 7.7 of the Bylaws limit the personal liability of directors to the
Company or its shareholders for monetary damages for breach of fiduciary duty.
The provisions of the Company Certificate and Bylaws are collectively referred
to herein as the "Director Liability and Indemnification Provisions." The
Company Certificate and the Company Bylaws and Company Bylaws are included as
exhibits to this Registration Statement on Form S-1 of which this Prospectus is
a part.
The Director Liability and Indemnification Provisions define and clarify the
rights of certain individuals, including Company directors and officers, to
indemnification by the Company in the event of personal liability or expenses
incurred by them as a result of certain litigation against them. Such
provisions are consistent with Section 102(b)(7) of the Delaware General
Corporation Law, which is designed, among other things, to encourage qualified
individuals to serve as directors of Delaware corporations by permitting
Delaware corporations to include in their articles or certificates of
incorporation a provision limiting or eliminating directors' liability for
monetary damages and with other existing Delaware General Corporation Law
provisions permitting indemnification of certain individuals, including
directors and officers. The limitations of liability in the Director Liability
and Indemnification Provisions may not affect claims arising under the federal
securities laws.
In performing their duties, directors of a Delaware corporation are obligated
as fiduciaries to exercise their business judgment and act in what they
reasonably determine in good faith, after appropriate consideration, to be the
best interests of the corporation and its shareholders. Decisions made on that
basis are protected by the so-called "business judgment rule." The business
judgment rule is designed to protect directors from personal liability to the
corporation or its shareholders when business decisions are subsequently
challenged. However, the expense of defending lawsuits, the frequency with
which unwarranted litigation is brought against directors and the inevitable
uncertainties with respect to the outcome of applying the business judgment
rule to particular facts and circumstances mean that, as a practical matter,
directors and officers of a corporation rely on indemnity from, and insurance
procured by, the corporation they serve, as a financial backstop in the event
of such expenses or unforeseen liability. The Delaware legislature has
recognized that adequate insurance and indemnity provisions are often a
condition of an individual's willingness to serve as director of a Delaware
corporation. The Delaware General Corporation Law has for some time
specifically permitted corporations to provide indemnity and procure insurance
for its directors and officers.
Recent changes in the market for directors and officers liability insurance
have resulted in the unavailability for directors and officers of many
corporations of any meaningful liability insurance coverage. Insurance carriers
have in certain cases declined to renew existing directors and officers
liability policies, or
II-1
<PAGE>
have increased premiums to such an extent that the cost of obtaining such
insurance becomes prohibitive. Moreover, current policies often exclude
coverage for areas where the service of qualified independent directors is most
needed. For example, many policies do not cover liabilities or expenses arising
from directors' and officers' activities in response to attempts to take over a
corporation. Such limitations on the scope of insurance coverage, along with
high deductibles and low limits of liability, have undermined meaningful
directors and officers liability insurance coverage.
The unavailability of meaningful directors and officers liability insurance
is attributable to a number of factors, many of which are affecting the
liability insurance industry generally, including granting of unprecedented
damages awards and reduced investment income on insurance company investments.
According to published sources, the inability of corporations to provide
meaningful directors and officers liability insurance has had a damaging effect
on the ability of public corporations to recruit and retain corporate
directors. Although the Company has not directly experienced this problem, the
Company believes it is necessary to take every possible step to ensure that
they will be able to attract the best possible officers and directors.
Set forth below is a description of the Director Liability and
Indemnification Provisions. Such description is intended as a summary only and
is qualified in its entirety by reference to the Company Certificate and the
Company Bylaws.
Elimination of Liability in Certain Circumstances. Article Sixteenth of the
Company Certificate protects directors against monetary damages for breaches of
their fiduciary duty of care, except as set forth below. Under the Delaware
General Corporation Law, absent such liability provisions as are provided in
Article Sixteenth, directors could generally be held liable for gross
negligence for decisions made in the performance of their duty of care but not
for simple negligence. Article Sixteenth eliminates liability of directors for
negligence in the performance of their duties, including gross negligence. In a
context not involving a decision by the directors (i.e., a suit alleging loss
to the Company due to the directors' inattention to a particular matter) a
simple negligence standard might apply. Directors remain liable for breaches of
their duty of loyalty to the Company and its shareholders, as well as acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law and transactions from which a director derives
improper personal benefit. Article Sixteenth does not eliminate director
liability under Section 174 of the Delaware General Corporation Law, which
makes directors personally liable for unlawful dividends or unlawful stock
repurchases or redemptions and expressly sets forth a negligence standard with
respect to such liability.
While the Director Liability and Indemnification Provisions provide directors
with protection from awards of monetary damages for breaches of the duty of
care, they do not eliminate the directors' duty of care. Accordingly, these
provisions will have no effect on the availability of equitable remedies such
as an injunction or rescission based upon a director's breach of the duty of
care. The provisions of Article Sixteenth, which eliminates liability as
described above, will apply to officers of the Company only if they are
directors of the Company and are acting in their capacity as directors, and
will not apply to officers of the Company who are not directors. The
elimination of liability of directors for monetary damages in the circumstances
described above may deter persons from bringing third-party or derivative
actions against directors to the extent such actions seek monetary damages.
Indemnification and Insurance. Under Section 145 of the Delaware General
Corporation Law, directors and officers as well as other employees and
individuals may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation--a
"derivative action") if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar
II-2
<PAGE>
standard of care is applicable in the case of the derivative actions, except
that indication only extends to expenses (including attorneys' fees) incurred
in connection with defense or settlement of such an action, and the Delaware
General Corporation Law requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation.
Section 7.7 of the Bylaws provides that the Company shall indemnify any
person to whom, and to the extent, indemnification may be granted pursuant to
Section 145 of the Delaware General Corporation law.
Article Eleventh of the Company Certificate provides that a person who was or
is made a party to, or is involved in, any action, suit or proceeding by reason
of the fact that he is or was a director, officer or employee of the Company
will be indemnified by the Company against all expenses and liabilities,
including counsel fees, reasonably incurred by or imposed upon him, except in
such cases where the director, officer or employee is adjudged guilty of
willful misfeasance or malfeasance in the performance of his duties. Article
Eleventh also provides that the right of indemnification shall be in addition
to and not exclusive of all other rights to which such director, officer or
employee may be entitled.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.(i) Memorandum of Understanding between Marriott Corporation and
Certain Bondholders dated as of March 10, 1993 (incorporated by
reference from Current Report on Form 8-K dated March 17, 1993).
2.(ii) Stipulation and Agreement of Compromise and Settlement
(incorporated by reference from Registration Statement No. 33-
62444).
3.1(i) Restated Certificate of Incorporation of Marriott Corporation
(incorporated by reference to Current Report on Form 8-K dated
October 23, 1993).
**3.1(ii) Certificate of Correction filed to correct a certain error in the
Restated Certificate of Incorporation of Host Marriott Corporation
filed in the Office of the Secretary of State of Delaware on
August 11, 1992, filed in the Office of the Secretary of State of
Delaware on October 11, 1994.
3.2 Amended Marriott Corporation Bylaws (incorporated by reference to
Current Report on Form 8-K dated October 23, 1993).
4.1(i) Indenture between Marriott Corporation and The First National Bank
of Chicago dated as of March 1, 1985 (incorporated by reference
from Registration Statement No. 2-97034).
4.1(ii) Second Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of February 1, 1986
(incorporated by reference from Current Report on Form 8-K dated
February 4, 1986).
4.1(iii) Third Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of December 1, 1986
(incorporated by reference from Current Report on Form 8-K dated
December 10, 1986).
4.1(iv) Fourth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of May 1, 1987
(incorporated by reference from Current Report on Form 8-K dated
May 7, 1987).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.1(v) Fifth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of June 12, 1987
(incorporated by reference from Current Report on Form 8-K dated
June 18, 1987).
4.1(vi) Sixth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of October 23, 1987
(incorporated by reference from Current Report on Form 8-K dated
October 30, 1987).
4.1(vii) Seventh Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of January 15, 1988
(incorporated by reference from Current Report on Form 8-K dated
January 26, 1988).
4.1(viii) Eighth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of February 1, 1988
(incorporated by reference from Current Report on Form 8-K dated
February 8, 1988).
4.1(ix) Ninth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of May 1, 1988
(incorporated by reference from Current Report on Form 8-K dated
May 9, 1988).
4.1(x) Tenth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of May 2, 1988
(incorporated by reference from Current Report on Form 8-K dated
May 24, 1988).
4.1(xi) Eleventh Supplemental Indenture between Marriott Corporation and
The First National Bank Chicago dated as of August 27, 1990
(incorporated by reference from Current Report on Form 8-K dated
September 4, 1990).
4.1(xii) Twelfth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of July 11, 1991
(incorporated by reference from Current Report on Form 8-K dated
July 19, 1991).
4.1(xiii) Thirteenth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of April 22, 1992
(incorporated by reference from Current Report on Form 8-K dated
April 29, 1992).
4.1(xiv) Fourteenth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of April 28, 1992
(incorporated by reference from Current Report on Form 8-K dated
May 5, 1992).
4.1(xv) Fifteenth Supplemental Indenture between Marriott Corporation and
Bank One, Columbus, NA. dated as of October 8, 1993 ((incorporated
by reference from Current Report on Form 8-K dated October 23,
1993).
4.2(i) Indenture between Marriott Corporation and Chemical Bank dated as
of June 5, 1991 (incorporated by reference from Registration
Statement No. 33-39858).
4.2(ii) First Supplemental Indenture dated as of September 30, 1993 among
Marriott Corporation, Chemical Bank and Marriott International,
Inc. (incorporated by reference from Current Report on Form 8-K
dated October 23, 1993).
4.3(i) Marriott Corporation Certificate of Designation of the Series A
Cumulative Convertible Preferred Stock dated December 17, 1991
(incorporated by reference from Current Report on Form 8-K dated
December 23, 1991).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.3(ii) Marriott Corporation Certificate of Designation, Preferences and
Rights of Series A Junior Participating Preferred Stock
(incorporated by reference from Registration Statement No.
33-39858).
4.4(i) Rights Agreement between Marriott Corporation and the Bank of New
York as Rights Agent dated February 3, 1989 (incorporated by
reference to Registration Statement No. 33-62444).
4.4(ii) First Amendment to Rights Agreement between Marriott Corporation
and Bank of New York as Rights Agent dated as of October 8, 1993
(incorporated by reference to Registration Statement No. 33-
51707).
4.5 Indenture by and among Host Marriott Hospitality, Inc., as Issuer,
HMH Holdings, Inc., as Parent Guarantor, HMH Properties, Inc.,
Host Marriott Travel Plazas, Inc., Gladieux Corporation, Host
International, Inc., Marriott Family Restaurants, Inc., Marriott
Financial Services, Inc., HMH Courtyard Properties, Inc., and
Marriott Retirement Communities, Inc. and certain of their
Subsidiaries as Subsidiary Guarantors and Marine Midland Bank,
N.A., as Trustee, with respect to the New Notes (including the
Form of New Notes) (incorporated by reference from Current Report
on Form 8-K dated October 23, 1993).
**4.6(i) Form of Warrant Agreement by and between Host Marriott Corporation
and First Chicago Trust Company of New York as Warrant Agent.
**4.6(ii) Form of Warrant Certificate.
**5 Opinion of Christopher G. Townsend, Esq. as to legality of
securities being registered.
**7 Opinion of Potter, Anderson & Corroon as to liquidation preference
of Series A Cumulative Convertible Preferred Stock.
10.1 Marriott Corporation Executive Deferred Compensation plan dated as
of December 6, 1990 (incorporated by reference from Exhibit 19(i)
of the Annual Report on Form 10-K for the fiscal year ended
December 28, 1991).
10.2 Host Marriott Corporation 1993 Comprehensive Stock Incentive Plan
effective as of October 8, 1993 (incorporated by reference from
Current Report on Form 8-K dated October 23, 1993).
10.3 Distribution Agreement dated as of September 15, 1993 between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.4 Tax Sharing Agreement dated as of October 5, 1993 by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.5 Assignment and License Agreement dated as of October 8, 1993 by
and between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.6 Corporate Services Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.7 Procurement Services Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.8 Supply Agreement dated as of October 8, 1993 by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.9 Casualty Claims Administration Agreement dated as of October 8,
1993 by and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Current Report
on Form 8-K dated October 23, 1993).
10.10 Employee Benefits Administration Agreement dated as of October 8,
1993 by and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Current Report
on Form 8-K dated October 23, 1993).
10.11 Tax Administration Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.12 Employee Benefits and Other Employment Matters Allocation
Agreement dated as of October 8, 1993 by and between Marriott
Corporation and Marriott International, Inc. (incorporated by
reference from Current Report on Form 8-K dated October 23, 1993).
10.13 Noncompetition Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
+10.14 Host Marriott Lodging Management Agreement--Marriott Hotels,
Resorts and Hotels dated September 25, 1993 by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference to Registration Statement No. 33-
51707).
+10.14(ii) Host Marriott Lodging Management Agreement--Courtyard Hotels dated
September 25, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Registration Statement No. 33-51707).
+10.14(iii) Host Marriott Lodging Management Agreement--Residence Inns dated
September 25, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Registration Statement No. 33-51707).
+10.14(iv) Host Marriott Lodging Management Agreement--Fairfield Inns dated
September 25, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Registration Statement No. 33-51707).
10.15(i) Consolidation Letter Agreement pertaining to Courtyard Hotels
dated September 25, 1993 between a subsidiary of Marriott
International, Inc. and a subsidiary of the Company (incorporated
by reference to Registration Statement No. 33-51707).
10.15(ii) Consolidation Letter Agreement pertaining to Residence Inns dated
September 25, 1993 between a subsidiary of Marriott International,
Inc. and a subsidiary of the Company (incorporated by reference to
Registration Statement No. 33-51707).
10.15(iii) Consolidation Letter Agreement pertaining to Fairfield Inns dated
September 25, 1993 between a subsidiary of Marriott International,
Inc. and a subsidiary of the Company (incorporated by reference to
Registration Statement No. 33-51707).
+10.16 Marriott Senior Living Services Facilities Lease by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference to Registration Statement
No. 33-51707).
10.17(i) Line of Credit and Guarantee Reimbursement Agreement by and among
HMH Holdings, Inc. as borrower, Marriott International, Inc. as
lender and Marriott Corporation and certain subsidiaries as
guarantors dated as of October 8, 1993 (incorporated by reference
from Current Report on Form 8-K dated October 23, 1993).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.17(ii) Form of Amendment No. 1 to Line of Credit and Guarantee
Reimbursement Agreement among HMH Holdings, Inc. as Borrower,
Marriott International, Inc. as Lender and Host Marriott
Corporation; HMC Acquisitions, Inc.; Host Marriott GTN
Corporation; Host La Jolla, Inc.; Marriott Properties, Inc. and
Willmar Distributors, Inc. as Guarantors (incorporated by
reference to Registration Statement No. 33-51707).
**10.17(iii) Amendment No. 2 to Line of Credit and Guarantee Reimbursement
Agreement dated as of October 4, 1994, among HMH Holdings, Inc.
as Borrower, Marriott International, Inc. as Lender, and Host
Marriott Corporation; HMC Acquisitions, Inc.; Host Marriott GTN
Corporation; Host LaJolla, Inc.; Marriott Properties, Inc. and
Willmar Distributors, Inc. as Guarantors.
10.17(iv) Amendment No. 3 to Line of Credit and Guarantee Reimbursement
Agreement dated as of November 29, 1994, among HMH Holdings,
Inc. as Borrower, Marriott International, Inc. as Lender, and
Host Marriott Corporation; HMC Acquisitions, Inc.; Host Marriott
GTN Corporation; Host LaJolla, Inc.; Marriott Properties, Inc.
and Willmar Distributors, Inc. as Guarantors (incorporated by
reference to Current Report on Form 10-K dated March 29, 1995).
10.18 Philadelphia Convention Center Hotel Mortgage Commitment Letter
dated as of October 8, 1993 by and between Philadelphia Market
Street Marriott Hotel Limited Partnership and Marriott
International, Inc. (incorporated by reference to Registration
Statement No. 33-51707).
10.19 LYONs Allocation Agreement dated as of September 30, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.20 Host Consulting Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.21 Architecture and Construction Services Agreement dated as of
October 8, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference from
Current Report on Form 8-K dated October 23, 1993).
10.22 Marriott/Host Marriott Employees' Profit Sharing Retirement and
Savings Plan and Trust (incorporated by reference from
Registration Statement No. 33-62444).
10.23 Working Capital Agreement by and between Host Marriott
Corporation and Marriott International, Inc. dated as of
September 25, 1993 (incorporated by reference from Registration
Statement No. 33-62444)
*11 Statement re: Computation of Per Share Earnings.
*12 Computation of Ratio of Earnings to Fixed Charges.
*22 Subsidiaries of Host Marriott Corporation.
*23.1 Consent of Independent Public Accountants.
**23.2 Consent of Christopher G. Townsend, Esq. (included in his
opinion filed as Exhibit 5).
**23.3 Consent of Potter, Anderson & Corroon (included in its opinion
filed as Exhibit 7).
</TABLE>
- --------
* Filed herewith.
** Previously filed.
+ Agreement filed is illustrative of numerous other agreements to which the
Company is a party.
II-7
<PAGE>
(b) Financial Statements Schedules
The following financial statement schedules of Host Marriott Corporation are
included:
Schedule I
--Condensed financial information of
registrant S-2 to S-6
Schedule III
--Real estate and accumulated depreciation S-7
to S-8
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
ITEM 17: UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of registrant pursuant to the provisions described under Item 14 above,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of such registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BETHESDA,
STATE OF MARYLAND, ON APRIL 10, 1995.
Host Marriott Corporation
/s/ Matthew J. Hart
By___________________________________
Matthew J. Hart
Executive Vice President and Chief
Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
President, Chief
* Executive Officer April 10, 1995
- ------------------------------------- (Principal
STEPHEN F. BOLLENBACH Executive Officer)
and Director
Executive Vice
/s/ Matthew J. Hart President and Chief April 10, 1995
- ------------------------------------- Financial Officer
MATTHEW J. HART (Principal
Financial Officer)
Senior Vice
/s/ Jeffrey P. Mayer President-- Finance April 10, 1995
- ------------------------------------- and Corporate
JEFFREY P. MAYER Controller
(Principal
Accounting Officer)
Chairman of the
- ------------------------------------- Board of Directors
RICHARD E. MARRIOTT
Director
* April 10, 1995
- -------------------------------------
R. THEODORE AMMON
II-9
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
Director
- -------------------------------------
J.W. MARRIOTT, JR.
Director
* April 10, 1995
- -------------------------------------
ANN DORE MCLAUGHLIN
Director
* April 10, 1995
- -------------------------------------
HARRY J. VINCENT
Director
* April 10, 1995
- -------------------------------------
ANDREW J. YOUNG
/s/ Matthew J. Hart April 10, 1995
- -------------------------------------
MATTHEW J. HART ATTORNEY-IN-FACT
II-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
TO HOST MARRIOTT CORPORATION
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Host Marriott Corporation and
subsidiaries (formerly Marriott Corporation), included in this registration
statement and have issued our report thereon dated February 24, 1995. Our
audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules appearing on
pages S-2 through S-8 are the responsibility of the Company's management and
are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic consolidated financial
statements. These schedules have been subject to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in
our opinion, fairly state in all material respects the financial data required
to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 24, 1995
S-1
<PAGE>
SCHEDULE I
PAGE 1 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1994 1993
------------ ------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Property and Equipment...... $1,750 $1,249
Investments in Affiliates... 31 66
Notes Receivable............ 11 84
Accounts Receivable......... 47 37
Inventories................. 6 7
Investment in and advances
to Holdings................ 820 783
Other Assets................ 57 161
Cash and Cash Equivalents... 45 55
------ ------
Total Assets............ $2,767 $2,442
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Debt carrying a Company
guarantee of repayment... $ 612 $ 488
Debt not carrying a Com-
pany guarantee of repay-
ment..................... 754 749
------ ------
1,366 1,237
Accounts Payable and Accrued
Expenses................... 67 74
Deferred Income Taxes....... 476 442
Other Liabilities........... 148 164
Convertible Subordinated
Debt....................... -- 20
------ ------
Total Liabilities....... 2,057 1,937
------ ------
Shareholders' Equity
Convertible Preferred
Stock.................... 13 14
Common Stock.............. 154 130
Additional Paid-in Capi-
tal...................... 479 253
Retained Earnings......... 64 108
------ ------
710 505
------ ------
Total Liabilities and
Shareholders' Equity... $2,767 $2,442
====== ======
</TABLE>
- --------
The Notes to Consolidated Financial Statements of Host Marriott Corporation and
Subsidiaries are an integral part of these statements.
See Accompanying Notes to Condensed Financial Information.
S-2
<PAGE>
SCHEDULE I
PAGE 2 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 30, 1994; DECEMBER 31, 1993; AND JANUARY 1, 1993
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues................................................. $352 $ 467 $ 548
Operating costs and expenses............................. 294 445 500
----- ----- -----
Operating profit before corporate expenses and interest.. 58 22 48
Corporate expenses....................................... (20) (28) (48)
Interest expense......................................... (86) (164) (214)
Interest income.......................................... 12 12 7
----- ----- -----
Loss before income taxes, equity in earnings of subsidi-
aries and cumulative effect of changes in accounting
principles.............................................. (36) (158) (207)
Equity in earnings of Holdings........................... 7 71 120
Benefit for income taxes................................. 4 16 38
----- ----- -----
Loss before equity in earnings of Marriott International
and cumulative effect of changes in accounting princi-
ples.................................................... (25) (71) (49)
Equity in earnings of Marriott International, net-of-tax. -- 123 134
----- ----- -----
Income (loss) before cumulative effect of changes in ac-
counting principles..................................... (25) 52 85
Cumulative effect of changes in accounting principles.... -- (2) --
----- ----- -----
Net income (loss)........................................ $ (25) $ 50 $ 85
===== ===== =====
</TABLE>
- --------
The Notes to Consolidated Financial Statements of Host Marriott Corporation and
Subsidiaries are an integral part of these statements.
See Accompanying Notes to Condensed Financial Information.
S-3
<PAGE>
SCHEDULE I
PAGE 3 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 30, 1994; DECEMBER 31, 1993; AND JANUARY 1, 1993
<TABLE>
<CAPTION>
1994 1993 1992
----- ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FROM OPERATIONS................................... $ 34 $ 81 $ 67
----- ------ -------
INVESTING ACTIVITIES
Net proceeds from sale of assets..................... 45 46 377
Capital expenditures................................. (133) (100) (34)
Acquisitions......................................... (417) -- --
Other................................................ 99 (32) (77)
----- ------ -------
Cash from (used in) investing activities............. (406) (86) 266
----- ------ -------
FINANCING ACTIVITIES
Issuances of debt.................................... 211 287 519
Issuances of common stock............................ 238 12 7
Repayments of debt................................... (91) (453) (1,123)
Transfers from Marriott International and Holdings,
net................................................. 4 357 380
Dividends paid....................................... -- (33) (41)
Cash distributed to Marriott International........... -- (272) --
----- ------ -------
Cash from (used in) financing activities............. 362 (102) (258)
----- ------ -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... $ (10) $ (107) $ 75
===== ====== =======
</TABLE>
- --------
The Notes to Consolidated Financial Statements of Host Marriott Corporation and
Subsidiaries are an integral part of these statements.
See Accompanying Notes to Condensed Financial Information.
S-4
<PAGE>
SCHEDULE I
PAGE 4 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
A) On October 8, 1993, Host Marriott Corporation (the "Parent Company",
formerly Marriott Corporation) completed a Distribution of Marriott
International common stock and an Exchange Offer. See Note 2 to the
Company's consolidated financial statements for more information about the
Distribution and Exchange Offer.
In connection with the Exchange Offer, the Parent Company effected a
Restructuring (the "Restructuring"). As a result of the Restructuring, the
Parent Company's most significant asset is the capital stock of a wholly-
owned subsidiary, HMH Holdings, Inc. ("Holdings"). Holdings' primary asset
is the capital stock of Host Marriott Hospitality, Inc. ("Hospitality"),
and Holdings is the borrower under a $630 million Line of Credit with
Marriott International.
In the Restructuring, most of the Parent Company's real estate and
operating assets were transferred to subsidiaries of Hospitality. The
remaining assets were retained directly by the Parent Company and certain
of its other subsidiaries (the "Retained Businesses") and are unrestricted.
Hospitality is the issuer of senior notes (the "New Notes") secured by a
pledge of the stock of, and guaranteed by, Holdings, Hospitality and
certain of its subsidiaries. The indenture governing these New Notes
contain covenants that, among other things, limit the ability of
Hospitality to pay dividends and make other distributions and restricted
payments, incur additional debt, create additional liens on its
subsidiaries' assets, engage in certain transactions with related parties,
enter into agreements which restrict a subsidiary in paying dividends or
making certain other payments and limit the activities and businesses of
Holdings. At December 30, 1994, substantially all of Hospitality's net
assets are restricted.
Accordingly, the accompanying financial statements present the operations
of the Parent Company and Retained Businesses with the investment in, and
operations of, Holdings and Hospitality presented on the equity method of
accounting.
B) The accompanying financial statements present the financial position,
results of operations and cash flows of the Parent Company and Retained
Businesses as if the organizational structure described in Note A was in
place for all periods presented. Marriott Corporation's historical basis in
the assets and liabilities of the Parent Company and Retained Businesses has
been carried over. All material intercompany transactions between the
companies have been eliminated.
C) As a result of the Distribution and its effect on the structure of the
Parent Company and Retained Businesses, the financial statement presentation
has been altered to better reflect the Parent Company and Retained
Businesses' current business segments and operating environment.
Accordingly, certain financial statement information for 1993 and 1992 has
been reformatted and reclassified to reflect the Parent Company and Retained
Businesses' current business segments and operating environment.
D) Under the terms of the Exchange Offer, Hospitality issued New Notes as
partial consideration for Old Notes, originally issued by the Company.
Additionally, the Company has secured the Old Series I Notes as discussed in
Note 2 to the Company's consolidated financial statements. Accordingly, for
the twelve-week period from October 8, 1993 through December 31, 1993, and
for the fiscal year ended December 30, 1994, Hospitality's financial
statements reflect the impact of the New Notes actually issued plus the
effects of the Old Series I Notes which have been pushed down to
Hospitality. For the periods presented up to October 8, 1993, Hospitality's
financial statements reflect the pushed down effects of 100% of that
S-5
<PAGE>
SCHEDULE I
PAGE 5 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION--(CONTINUED)
portion of the Old Notes that would have been replaced with New Notes had
the Company received tenders for 100% of the aggregate amount of Old Notes
that were subject to the Exchange Offer. Investments in and advances to
Holdings and debt include $87 million at December 30, 1994 and December 31,
1993 which has been pushed down to Hospitality. Related interest expense of
$8 million, $94 million and $125 million fiscal 1994, 1993, and 1992,
respectively, is included in interest expense in the accompanying condensed
statements of income.
Aggregate debt maturities at December 30, 1994 are (in millions):
<TABLE>
<S> <C>
1995................................................................ $ 97
1996................................................................ 118
1997................................................................ 54
1998................................................................ 334
1999................................................................ 25
Thereafter.......................................................... 738
------
$1,366
======
</TABLE>
E) The accompanying statements of income reflect the equity in earnings of
Holdings, including its wholly-owned subsidiary Hospitality after
elimination of interest expense (see Note D) and before income taxes.
Holdings is included in the consolidated income tax returns of Host Marriott
Corporation.
F) Corporate expenses in 1993 and 1992 reflect pre-tax costs of $13 million and
$16 related to the Distribution discussed in Note A.
S-6
<PAGE>
SCHEDULE III
PAGE 1 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 30, 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL COSTS DECEMBER 30, 1994
----------------- ------------------------
SUBSEQUENT DATE OF
BUILDINGS & COSTS BUILDINGS & ACCUMULATED COMPLETION OF DATE DEPRECIATION
DESCRIPTION DEBT LAND IMPROVEMENTS CAPITALIZED LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED LIFE
----------- ---- ---- ------------ ----------- ---- ------------ ------ ------------ ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Full-service Hotels:
New York Marriott
Marquis Hotel New
York, NY.......... $354 $ 0 $ 552 $ 14 $ 0 $ 566 $ 566 $ (81) 1986 N/A 50
San Francisco
Moscone Center San
Francisco, CA..... 230 0 278 2 0 280 280 (22) 1989 N/A 50
Other full-service
properties, each
less than 5% of
total............. 254 115 786 193 115 979 1,094 (173) various various 40
---- ---- ------ ---- ---- ------ ------ -----
Total full-
service......... 838 115 1,616 209 115 1,825 1,940 (276)
Courtyard........... 0 112 395 7 112 402 514 (42) various N/A 40
Residence Inn....... 0 38 104 21 40 123 163 (10) various N/A 40
Other properties,
each less than 5% of
total............... 0 129 5 23 152 5 157 (1) various N/A various
---- ---- ------ ---- ---- ------ ------ -----
Total........... $838 $394 $2,120 $260 $419 $2,355 $2,774 $(329)
==== ==== ====== ==== ==== ====== ====== =====
</TABLE>
S-7
<PAGE>
SCHEDULE III
PAGE 2 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 30, 1994
(IN MILLIONS)
NOTES:
(A) The change in total cost of properties for the year ended December 30, 1994
is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1993....................................... $2,668
Additions:
Acquisitions..................................................... 502
Capital expenditures............................................. 40
Deductions:
Dispositions and other........................................... (436)
------
Balance at December 30, 1994....................................... $2,774
======
</TABLE>
(B) The change in accumulated depreciation and amortization for the year ended
December 30, 1994 is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1993......................................... $298
Depreciation and amortization....................................... 58
Dispositions and other.............................................. (27)
----
Balance at December 30, 1994......................................... $329
====
</TABLE>
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $2,231 million at December 30, 1994.
(D) The total cost of properties excludes construction-in-progress properties.
S-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.(i) Memorandum of Understanding between Marriott Corporation and
Certain Bondholders dated as of March 10, 1993 (incorporated by
reference from Current Report on Form 8-K dated March 17, 1993).
2.(ii) Stipulation and Agreement of Compromise and Settlement
(incorporated by reference from Registration Statement No. 33-
62444).
3.1(i) Restated Certificate of Incorporation of Marriott Corporation
(incorporated by reference to Current Report on Form 8-K dated
October 23, 1993).
**3.1(ii) Certificate of Correction filed to correct a certain error in the
Restated Certificate of Incorporation of Host Marriott
Corporation filed in the Office of the Secretary of State of
Delaware on August 11, 1992, fled in the Office of the Secretary
of State of Delaware on October 11, 1994.
3.2 Amended Marriott Corporation Bylaws (incorporated by reference to
Current Report on Form 8-K dated October 23, 1993).
4.1(i) Indenture between Marriott Corporation and The First National
Bank of Chicago dated as of March 1, 1985 (incorporated by
reference from Registration Statement No. 2-97034).
4.1(ii) Second Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of February 1, 1986
(incorporated by reference from Current Report on Form 8-K dated
February 4, 1986).
4.1(iii) Third Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of December 1, 1986
(incorporated by reference from Current Report on Form 8-K dated
December 10, 1986).
4.1(iv) Fourth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of May 1, 1987
(incorporated by reference from Current Report on Form 8-K dated
May 7, 1987).
4.1(v) Fifth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of June 12, 1987
(incorporated by reference from Current Report on Form 8-K dated
June 18, 1987).
4.1(vi) Sixth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of October 23, 1987
(incorporated by reference from Current Report on Form 8-K dated
October 30, 1987).
4.1(vii) Seventh Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of January 15, 1988
(incorporated by reference from Current Report on Form 8-K dated
January 26, 1988).
4.1(viii) Eighth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of February 1, 1988
(incorporated by reference from Current Report on Form 8-K dated
February 8, 1988).
4.1(ix) Ninth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of May 1, 1988
(incorporated by reference from Current Report on Form 8-K dated
May 9, 1988).
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.1(x) Tenth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of May 2, 1988
(incorporated by reference from Current Report on Form 8-K dated
May 24, 1988).
4.1(xi) Eleventh Supplemental Indenture between Marriott Corporation and
The First National Bank Chicago dated as of August 27, 1990
(incorporated by reference from Current Report on Form 8-K dated
September 4, 1990).
4.1(xii) Twelfth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of July 11, 1991
(incorporated by reference from Current Report on Form 8-K dated
July 19, 1991).
4.1(xiii) Thirteenth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of April 22, 1992
(incorporated by reference from Current Report on Form 8-K dated
April 29, 1992).
4.1(xiv) Fourteenth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of April 28, 1992
(incorporated by reference from Current Report on Form 8-K dated
May 5, 1992).
4.1(xv) Fifteenth Supplemental Indenture between Marriott Corporation and
Bank One, Columbus, NA. dated as of October 8, 1993 (incorporated
by reference from Current Report on Form 8-K dated October 23,
1993).
4.2(i) Indenture between Marriott Corporation and Chemical Bank dated as
of June 5, 1991 (incorporated by reference from Registration
Statement No. 33-39858).
4.2(ii) First Supplemental Indenture dated as of September 30, 1993 among
Marriott Corporation, Chemical Bank and Marriott International,
Inc. (incorporated by reference from Current Report on Form 8-K
dated October 23, 1993).
4.3(i) Marriott Corporation Certificate of Designation of the Series A
Cumulative Convertible Preferred Stock dated December 17, 1991
(incorporated by reference from Current Report on Form 8-K dated
December 23, 1991).
4.3(ii) Marriott Corporation Certificate of Designation, Preferences and
Rights of Series A Junior Participating Preferred Stock
(incorporated by reference from Registration Statement No.
33-39858).
4.4(i) Rights Agreement between Marriott Corporation and the Bank of New
York as Rights Agent dated February 3, 1989 (incorporated by
reference to Registration Statement No. 33-62444).
4.4(ii) First Amendment to Rights Agreement between Marriott Corporation
and Bank of New York as Rights Agent dated as of October 8, 1993
(incorporated by reference to Registration Statement No. 33-
51707).
4.5 Indenture by and among Host Marriott Hospitality, Inc., as
Issuer, HMH Holdings, Inc., as Parent Guarantor, HMH Properties,
Inc., Host Marriott Travel Plazas, Inc., Gladieux Corporation,
Host International, Inc., Marriott Family Restaurants, Inc.,
Marriott Financial Services, Inc., HMH Courtyard Properties,
Inc., and Marriott Retirement Communities, Inc. and certain of
their Subsidiaries as Subsidiary Guarantors and Marine Midland
Bank, N.A., as Trustee, with respect to the New Notes (including
the Form of New Notes) (incorporated by reference from Current
Report on Form 8-K dated October 23, 1993).
**4.6(i) Form of Warrant Agreement by and between Host Marriott
Corporation and First Chicago Trust Company of New York as
Warrant Agent.
**4.6(ii) Form of Warrant Certificate.
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**5 Opinion of Christopher G. Townsend, Esq. as to legality of
securities being registered.
**7 Opinion of Potter, Anderson & Corroon as to liquidation preference
of Series A Cumulative Convertible Preferred Stock.
10.1 Marriott Corporation Executive Deferred Compensation plan dated as
of December 6, 1990 (incorporated by reference from Exhibit 19(i)
of the Annual Report on Form 10-K for the fiscal year ended
December 28, 1991).
10.2 Host Marriott Corporation 1993 Comprehensive Stock Incentive Plan
effective as of October 8, 1993 (incorporated by reference from
Current Report on Form 8-K dated October 23, 1993).
10.3 Distribution Agreement dated as of September 15, 1993 between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.4 Tax Sharing Agreement dated as of October 5, 1993 by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.5 Assignment and License Agreement dated as of October 8, 1993 by
and between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.6 Corporate Services Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.7 Procurement Services Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.8 Supply Agreement dated as of October 8, 1993 by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.9 Casualty Claims Administration Agreement dated as of October 8,
1993 by and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Current Report
on Form 8-K dated October 23, 1993).
10.10 Employee Benefits Administration Agreement dated as of October 8,
1993 by and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Current Report
on Form 8-K dated October 23, 1993).
10.11 Tax Administration Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.12 Employee Benefits and Other Employment Matters Allocation
Agreement dated as of October 8, 1993 by and between Marriott
Corporation and Marriott International, Inc. (incorporated by
reference from Current Report on Form 8-K dated October 23, 1993).
10.13 Noncompetition Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
</TABLE>
E-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
+10.14 Host Marriott Lodging Management Agreement--Marriott Hotels,
Resorts and Hotels dated September 25, 1993 by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference to Registration Statement No. 33-
51707).
+10.14(ii) Host Marriott Lodging Management Agreement--Courtyard Hotels
dated September 25, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Registration Statement No. 33-51707).
+10.14(iii) Host Marriott Lodging Management Agreement--Residence Inns dated
September 25, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Registration Statement No. 33-51707).
+10.14(iv) Host Marriott Lodging Management Agreement--Fairfield Inns dated
September 25, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Registration Statement No. 33-51707).
10.15(i) Consolidation Letter Agreement pertaining to Courtyard Hotels
dated September 25, 1993 between a subsidiary of Marriott
International, Inc. and a subsidiary of the Company
(incorporated by reference to Registration Statement No. 33-
51707).
10.15(ii) Consolidation Letter Agreement pertaining to Residence Inns
dated September 25, 1993 between a subsidiary of Marriott
International, Inc. and a subsidiary of the Company
(incorporated by reference to Registration Statement No. 33-
51707).
10.15(iii) Consolidation Letter Agreement pertaining to Fairfield Inns
dated September 25, 1993 between a subsidiary of Marriott
International, Inc. and a subsidiary of the Company
(incorporated by reference to Registration Statement No. 33-
51707).
+10.16 Marriott Senior Living Services Facilities Lease by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference to Registration Statement
No. 33-51707).
10.17(i) Line of Credit and Guarantee Reimbursement Agreement by and
among HMH Holdings, Inc. as borrower, Marriott International,
Inc. as lender and Marriott Corporation and certain subsidiaries
as guarantors dated as of October 8, 1993 (incorporated by
reference from Current Report on Form 8-K dated October 23,
1993).
10.17(ii) Form of Amendment No. 1 to Line of Credit and Guarantee
Reimbursement Agreement among HMH Holdings, Inc. as Borrower,
Marriott International, Inc. as Lender and Host Marriott
Corporation; HMC Acquisitions, Inc.; Host Marriott GTN
Corporation; Host La Jolla, Inc.; Marriott Properties, Inc. and
Willmar Distributors, Inc. as Guarantors (incorporated by
reference to Registration Statement No. 33-51707).
**10.17(iii) Amendment No. 2 to Line of Credit and Guarantee Reimbursement
Agreement dated as of October 4, 1994, among HMH Holdings, Inc.
as Borrower, Marriott International, Inc. as Lender, and Host
Marriott Corporation; HMC Acquisitions, Inc.; Host Marriott GTN
Corporation; Host LaJolla, Inc; Marriott Properties, Inc. and
Willmar Distributors, Inc. as Guarantors.
10.17(iv) Amendment No. 3 to Line of Credit and Guarantee Reimbursement
Agreement dated as of November 29, 1994, among HMH Holdings,
Inc. as Borrower, Marriott International, Inc. as Lender, and
Host Marriott corporation; HMC Acquisitions, Inc.; Host Marriott
GTN Corporation; Host LaJolla, Inc.; Marriott Properties, Inc.
and Willmar Distributors, Inc. as Guarantors (incorporated by
reference to Current Report on Form 10-K dated March 29, 1995).
</TABLE>
E-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.18 Philadelphia Convention Center Hotel Mortgage Commitment Letter
dated as of October 8, 1993 by and between Philadelphia Market
Street Marriott Hotel Limited Partnership and Marriott
International, Inc. (incorporated by reference to Registration
Statement No. 33-51707).
10.19 LYONs Allocation Agreement dated as of September 30, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.20 Host Consulting Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.21 Architecture and Construction Services Agreement dated as of
October 8, 1993 by and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Current Report
on Form 8-K dated October 23, 1993).
10.22 Marriott/Host Marriott Employees' Profit Sharing Retirement and
Savings Plan and Trust (incorporated by reference from
Registration Statement No. 33-62444).
10.23 Working Capital Agreement by and between Host Marriott Corporation
and Marriott International, Inc. dated as of September 25, 1993
(incorporated by reference from Registration Statement No. 33-
62444).
*11 Statement re: Computation of Per Share Earnings.
*12 Computation of Ratio of Earnings to Fixed Changes.
*22 Subsidiaries of Host Marriott Corporation.
*23.1 Consent of Independent Public Accountants.
**23.2 Consent of Christopher G. Townsend, Esq. (included in his opinion
filed as exhibit 5).
**23.3 Consent of Potter, Anderson & Corroon (included in its opinion
filed as exhibit 7).
</TABLE>
- --------
* Filed herewith.
** Previously filed.
+ Agreement filed is illustrative of numerous other agreements to which the
Company is a party.
E-5
<PAGE>
EXHIBIT 11
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS
---------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Net income (loss)........................................ $ (25) $ 50 $ 85
Less: Dividends on convertible preferred stock........... -- 8 17
------ ------ ------
Net income (loss) available for common shareholders...... $ (25) $ 42 $ 68
====== ====== ======
Primary Earnings (Loss) Per Common Share
Shares--
Weighted average number of common shares outstanding... 151.5 107.4 99.8
Assuming distribution of common shares reserved under
employee stock purchase plan, based on withholdings to
date, less shares assumed purchased at average
market(1)............................................. -- .1 .1
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed
purchased at average market(1)........................ -- 5.5 5.8
Assuming distribution of common shares issuable for
warrants, less shares assumed purchased at average
market(1)(2).......................................... -- -- --
------ ------ ------
151.5 113.0 105.7
====== ====== ======
Primary Earnings (Loss) Per Common Share................. $ (.17) $ .37 $ .64
====== ====== ======
Fully Diluted Earnings (Loss) Per Common Share
Shares--
Weighted average number of common shares outstanding... 151.5 107.4 99.8
Assuming distribution of common shares reserved under
employee stock purchase plan, based on withholdings to
date, less shares assumed purchased at higher of
average or ending market(1)........................... -- .1 .2
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed
purchased at higher of average or ending market(1).... -- 7.6 6.5
Assuming distribution of common shares issuable for
warrants, less shares assumed purchased at higher of
average or ending market(1)(2)........................ -- -- --
Assuming issuance of common shares upon conversion of
subordinated debt(3).................................. -- .7 --
Assuming issuance of common shares upon conversion of
convertible preferred stock(3)........................ -- 5.5 --
------ ------ ------
151.5 121.3 106.5
====== ====== ======
Fully Diluted Earnings (Loss) Per Common Share........... $ (.17) $ .35 $ .64
====== ====== ======
</TABLE>
- --------
(1) Common equivalent shares and other potentially dilutive securities were
antidilutive in 1994.
(2) Stock warrants were issued in 1994.
(3) Convertible subordinated debt and convertible preferred stock were
antidilutive in 1992 and 1994.
<PAGE>
EXHIBIT 12
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
YEAR ENDED DECEMBER 30, 1994
(IN MILLIONS, EXCEPT RATIO AMOUNTS)
<TABLE>
<S> <C>
Income (loss) from continuing operations before income taxes............ $ (23)
Add (deduct)
Fixed charges......................................................... 261
Capitalized interest.................................................. (5)
Amortization of capitalized interest.................................. 8
Losses related to certain 50% or less owned affiliates................ 2
Minority interest in consolidated affiliates.......................... 1
-----
Adjusted Earnings....................................................... $244
=====
Fixed Charges:
Interest on indebtedness and amortization of debt expense and premium. $211
Portion of rents representative of the interest factor................ 42
Debt service guarantee interest expense of unconsolidated affiliates.. 8
-----
Total Fixed Charges..................................................... $261
=====
Deficiency of Earnings to Fixed Charges................................. .93
=====
</TABLE>
<PAGE>
EXHIBIT 22
PAGE 1 OF 3
HOST MARRIOTT CORPORATION
SUBSIDIARIES
1) Beachfront Properties, Inc.
2) CBM One Corporation
3) CBM Two Corporation
4) Cincinnati Terminal Services, Inc.
5) Cleveland Airport Service, Inc.
6) Deerfield Capital Trust
7) Farrell's Ice Cream Parlour Restaurants, Inc.
8) G.L. Insurance Corporation
9) Gladieux Corporation
10) HMC Acquisition Properties, Inc.
11) HMC Acquisitions, Inc.
12) HMC Eastside Financial Corporation
13) HMC Eastside, Inc.
14) HMC GP Holdings, Inc.
15) HMC Leisure Park Corporation
16) HMC Retirement Properties, Inc.
17) HMC SFO, Inc.
18) HMC Ventures, Inc.
19) HMC Ventures One, Inc.
20) HMC Ventures Two, Inc.
21) HMH Courtyard Properties, Inc.
22) HMH Holdings, Inc.
23) HMH Pentagon Corporation
24) HMH Properties, Inc.
25) HMH Westport Corporation
26) Host Airport Hotels, Inc.
<PAGE>
27) Host Gifts, Inc.
28) Host International, Inc.
29) Host International of Canada
30) Host International, Inc. of Kansas
31) Host International, Inc. of Maryland
32) Host Investment, Inc.
33) Host La Jolla, Inc.
34) Host Marriott BCH Hotel Corporation
35) Host Marriott GTN Corporation
36) Host Marriott Hospitality, Inc.
37) Host Marriott Travel Plazas, Inc.
38) Host Services of New York, Inc.
39) Host Services, Inc.
40) Hot Shoppes, Inc.
41) Hotel Management of Tucson, Inc
42) Hotel Properties Management, Inc.
43) Interdistributing Corporation
44) Las Vegas Terminal Restaurants, Inc.
45) MOHS Corporation
46) Marriott Airport Terminal Services, Inc.
47) Marriott Argentine Airline Catering, Inc.
48) Marriott Barbados Limited
49) Marriott Condominium Development Corporation
50) Marriott Desert Springs Corporation
51) Marriott FIBM One Corporation
52) Marriott Family Restaurants, Inc.
53) Marriott Family Restaurants, Inc. of Illinois
54) Marriott Family Restaurants, Inc. of Vermont
55) Marriott Family Restaurants, Inc. of Wisconsin
<PAGE>
56) Marriott Financial Services, Inc.
57) Marriott Hanover Hotel Corporation
58) Marriott MDAH One Corporation
59) Marriott MHP Two Corporation
60) Marriott Marquis Corporation
61) Marriott PLP Corporation
62) Marriott Park Ridge Corporation
63) Marriott Properties, Inc.
64) Marriott RIBM Three Corporation
65) Marriott RIBM Two Corporation
66) Marriott Realty Sales, Inc.
67) Marriott SBM One Corporation
68) Marriott SBM Two Corporation
69) Marriott YBG Corporation
70) Marriott's Bickford's Family Fare, Inc.
71) Marriott/Portman Finance Corporation (non-consolidated)
72) Michigan Host, Inc.
73) Montana Food and Beverage Services, Inc.
74) Philadelphia Airport Hotel Corporation
75) Philadelphia Market Street Hotel Corporation
76) RIBM One Corporation
77) S.D. Hotels, Inc.
78) SFM Finance Corporation
79) Saga Property Leasing Corporation
80) Saga Restaurants, Inc.
81) Sparky's Virgin Islands, Inc.
82) Straw Hat Franchising Company, Inc.
83) Sunshine Parkway Restaurants, Inc.
84) The Gift Collection, Inc.
85) Turnpike Restaurants, Inc.
86) Willmar Distributors, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in this registration
statement.
Arthur Andersen LLP
Washington, DC
April 10, 1995
